IMF Warns Eurozone That Greece Needs Far More Debt Relief

The IMF’s warning—made in a three-page paper circulated to eurozone officials over the weekend and published more broadly Tuesday—is a reality check for Europe and Greece about the political and economic commitments needed from both sides.

“The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date—and what has been proposed by” eurozone authorities, the IMF said in its latest assessment of Greece’s economy, The Wall Street Journal reported.

The IMF has repeatedly warned eurozone officials in recent days that Greece will need more debt restructuring than originally thought as capital controls asphyxiate its already-weakened economy. Under the tentative eurozone deal reached early Monday, officials say they would consider debt maturity extensions and rate reductions if Greece delivered on promised economic overhauls and budget cuts.

But the IMF said that even extending debt maturities by decades might not be enough to put Greece’s debt back on a sustainable path after the ravages of capital controls.

The eurozone’s failure to provide a stronger commitment on restructuring could jeopardize the proposed bailout as it may prohibit IMF involvement.

The currency bloc’s commitment so far is “not very concrete,” a senior IMF official said. “It’s somewhat weak.”

“We have made it very clear that before we go to the board, we need a concrete and ambitious solution to this debt problem,” the official said.

The IMF said one option was “a very dramatic extension” of Greece’s debt. Cutting rates and delaying the grace periods of the entire stock of European debt, including new assistance, by 30 years could kick Greece’s debt burdens well into the second half of the century, when a new generation of Greeks would bear the costs of the current era.

Borrowing at anything but the cheapest rates in the near term “will bring about an unsustainable debt dynamic for the next several decades,” the IMF warned.

“Other options include explicit annual transfers to the Greek budget or deep upfront haircuts” the IMF said. “The choice between the various options is for Greece and its European partners to decide.”

A debt write-down is a political non-starter for fiscal hawks such as Germany, however. The IMF’s dour debt assessment is a clear warning that the fragile bailout accord hasn’t removed the risk of a Greek exit from the eurozone and that the IMF needs a strong commitment for debt restructuring from the eurozone to participate. It could also bolster German Finance Minister Wolfgang Schäuble’s argument that a Greek exit from the eurozone may be a better alternative than the bailout as Berlin considers whether to back another round of emergency financing.

If the eurozone fails to provide the IMF assurance that it will reduce Greece’s debt burden to levels the fund believes is sustainable, it could imperil the emergency-lender’s involvement in the program. Fund rules largely prohibit the IMF from lending to countries without sustainable debt profiles.

Eurozone members want to keep the IMF in Greece for two reasons: To help cover the country’s estimated €85 billion ($93.5 billion) cash needs over the next three years, and to lend the program economic credibility.

Still, even though some analysts say the IMF is trying to reclaim some of the credibility it lost in the original Greek bailout, the fund could simply rely on Europe’s promises to consider debt relief rather than require a fully detailed restructuring pledge, as it did in 2012.

In 2010, the IMF’s growth forecasts were widely criticized as far too optimistic. But they allowed the IMF to say Greece’s debt was sustainable and didn’t need restructuring, paving the way for the fund to join Europe’s bailout and help the region contain its financial troubles.

The eurozone leaders’ statement, however, doesn’t promise debt relief. Rather, it largely reiterates its 2012 agreement to consider debt relief “if necessary.”

To help Europe’s case, the fund in recent days changed the way its measures debt sustainability. That gives the fund more room to support additional financing without breaching its sustainability rules, and relieves the IMF of some of the responsibility of pushing Europe to write down the value of Greece’s debt.

But even with the IMF’s new debt-sustainability gauge, the IMF’s outlook is particularly sobering as it highlights risks to the new bailout proposal, such as the ability of Greece to deliver on budget surplus targets.

“These projections remain subject to considerable downside risk, suggesting that there could be a need for additional further exceptional financing from Member States,” the IMF cautioned.

The IMF also cautioned that creditors may need to contribute even more cash than the latest €85 billion proposal. It said the country’s banking system may need even more capital injections and Athens would need to commit to strong new economic overhauls to meet their “ambitious” growth targets.