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IMF, EU clash over Greece's bailout prospects

Greece's international lenders are at loggerheads over how to solve Athens' debt crisis, threatening more trouble for the euro as the IMF demands European governments write off some of the Greek debt they hold.

Officials from Greece and the "troika" of European Union, European Central Bank and International Monetary Fund have told Reuters that tensions among them have increased of late as the Washington-based Fund has played tough.

It has been pushing to restructure debts Athens owes to public-sector foreign creditors. EU leaders prefer to give Greece more time to meet bailout goals.

While strains between Greece and its would-be saviors have been evident, as significant are frictions among the lenders.

"The problem is not between the IMF and Athens, it's between the IMF and the EU," one Greek official said, speaking like others on condition of anonymity. That view was confirmed by sources familiar with thinking in Brussels and Washington.

Already facing an electoral backlash over bailouts and austerity, and unsure what may be needed to defend the creaking public finances of heavyweights Spain and Italy, EU leaders do not relish IMF proposals that they swallow tens of billions of euros of losses on their holdings of Greek government bonds.

"Europe wants more time to see what will happen with Spain and Italy, perhaps even after the German election in 2013," the Greek official said. "The IMF wants Europe to come up with a comprehensive solution to its problems now."

The Fund, brought in for its expertise, global financial firepower and reputation for imposing fiscal discipline, is for its part keen to protect the hard-earned credibility it put on the line by joining in a bailout package that set Greece a target of cutting its deficit to under 120 percent of GDP by 2020.

Amid European political wrangling, the Fund, whose biggest shareholders are the United States and Japan and also include the likes of China, Russia and Saudi Arabia, believes a debt restructuring is now essential for Greece to meet its goals - although IMF officials say no formal proposal has yet been made.

Fund's Patience Tested

German Finance Minister Wolfgang Schaeuble, whose own creditor government has been concerned at slippage in Greece's efforts to cut spending and raise taxes, gave a rare public hint of IMF concerns last week: "You should ask around about what the mood is like in the IMF," he told reporters in Berlin, "In having to deal constantly with these European problems and the repeated failure of the Europeans to meet agreed targets."

A restructuring - essentially requiring the ECB and European governments to take losses on nearly 200 billion euros in Greek debt they hold - could ease Greece's burden.

Private investors took such a "haircut" this year, but with reforms being held up and a recession much deeper than expected, Greece seems likely to have to suffer more pain itself, or inflict more on its creditors, if it is to put its finances on a sustainable footing and resume market borrowing.

Out of the Greece's 204 billion-euro official debt, 20 billion is owed to the IMF, which would be repaid in full in the event of an official-sector restructuring. The ECB has so far refused to face any losses on the bonds it has purchased over past years to prop up Greek debt, estimated at about 50 billion.

With the Greek public pushing its government to resist more austerity, Finance Minister Yannis Stournaras's frustration at demands from lenders for sharper cuts prompted him to threaten resignation at one point last week, sources in Athens have said.

"It is now clear to the IMF that Greece will need more time or more money or both," a troika official told Reuters.

Greece has asked for an extra two years to meet interim targets and European leaders appear to agree. Stournaras, the finance minister, told Reuters on Tuesday that such an extension would cost an additional 13-15 billion euros, which could be covered without further pain for European taxpayers.

Such a gap could be covered through the issuance of more short-term debt, by seeking lower interest rates from the ongoing bailout loans or a rollover of debt held by the ECB.

France has backed the two-year pause; a euro zone official said Germany is not opposed, provided Athens shows results soon.

Tensions High

A senior Greek government official told Reuters, however, that the IMF preferred to see Europeans take losses on some of their previous loans to Athens, blocking any agreement: "The IMF wants an official-sector restructuring but we can't do that," the official said. "No one else wants it."

Participants said tension was high during a meeting between officials from Greece and the troika last week to thrash out an additional 11.5 billion euros worth of savings measures; at one point Stournaras threatened to quit if Poul Thomsen, the Dane who runs the IMF's relations with Greece, pressed for more cuts.

"Nothing pleases Thomsen any more," another Greek official said. "Last time the troika was here we agreed 5 to 5.5 billion euros would come from salary and pension cuts. Now we have come up with 7.5 to 8 billion, and they are not enough."

If Greece deviates substantially from the terms of the rescue package, the Fund, led by former French finance minister Christine Lagarde, could face questions from other members about slipping controls or double standards for borrowers. Analysts said it might even consider pulling out of the Greek commitment:

"In theory, the IMF could withdraw from the deal if it is not satisfied the bailout fulfilled the ... criteria," said Ben May of Capital Economics. "In practice, it isn't so black and white and there is obviously potential for some kind of fudge."

Disputes within the rescue mission, however, also reflect deeper concerns about Greece's ability to slash its debt-to-GDP ratio from a current level around 160 percent and to recover the confidence of private investors willing to buy its bonds.

"There is potentially quite a big standoff," said May of Capital Economics. "I don't see the bailout lasting to the end of its duration and it could break down at any time.

"Lots of ... bankers in the chorus seem to indicate they would be quite happy for Greece to leave the euro."

[Source: By Dina Kyriakidou and Lesley Wroughton, Reuters, Athens and Washington, 26Sep12]

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