Bloomberg: Greece bailout deadline looms ahead of busy EU election schedule

Greece has less than a month to iron out disagreements with its creditors over how to move forward with a rescue package that has been keeping the country afloat since 2010.

Euro-area finance ministers meeting in Brussels on Thursday will discuss how to complete a stalled bailout review, assure the involvement of the International Monetary Fund and unlock additional financial aid. A deal must be struck by the end of February, before as many as five European nations hold elections that will make negotiations politically difficult, according to an EU official familiar with the talks.

Several nations have made IMF participation essential, with German Finance Minister Wolfgang Schaeuble saying without the fund’s involvement “the precondition for a program is no longer” there. IMF Managing Director Christine Lagarde said they want to stay in the program but the fund has criticized the EU’s assessment of Greece’s fiscal targets as too ambitious and have questioned the sustainability of the nation’s debt.

And while European bailout auditors — the European Commission, the European Central Bank and the European Stability Mechanism — largely share Greek Prime Minister Alexis Tsipras’s view that no additional austerity measures are needed, they still demand more reforms in the country’s energy, products and services markets, before they sign off on the next disbursement.

Here are the most important issues related to the negotiations:

What does the IMF want?

IMF staff say fiscal measures currently in place won’t be sufficient to meet the target attached to the ESM-backed bailout for a budget surplus before interest payments equal to 3.5 percent of Greek gross domestic product in 2018 and beyond. A lower surplus means that Greece’s debt dynamic will worsen, and the IMF isn’t allowed to finance countries with unsustainable debt.

The current deadlock can be resolved if Germany and other euro-area states agree to lower Greece’s primary surplus targets to 1.5 percent of GDP, as the IMF has been asking, in which case, however, more debt-relief measures would be needed. The second option would be for Greece to legislate conditional fiscal measures, including pension cuts and a lower income-tax-free threshold, which will be triggered if the country fails to meet the target of 3.5 percent.

What does Greece say?

The Greek government disputes IMF projections and claims it won’t legislate “a single euro” of additional austerity on top of what has already been agreed. European auditors also estimate that existing measures are almost sufficient to meet the 3.5 percent target.

Greece would need parliamentary approval for the precautionary measures that the IMF demands. Tsipras’s thin majority could be at risk, as some party members have protested creditor demands. With just 153 lawmakers on his side in Greece’s 300-seat chamber, any defections could trigger new elections.

Is There a Way Around the Dispute?

Greece legislated a fiscal correction mechanism last year, which triggers cuts in case it fails to meet the bailout targets. The IMF disputes the effectiveness of this mechanism and asks for specific commitments, which would put Greece’s finances to a sustainable path.

The fund asks for a lower income-tax-free threshold and pension cuts. IMF officials said in a blog post in December that the country’s income tax regime “exempts more than half of households from any obligation.” The IMF also calls the Greek pension system “extremely generous.”

As the euro area resists calls for additional debt relief, which would make IMF demands on pensions and taxes less pressing, the fund and European officials are working to align their projections about Greece’s primary surplus.

Will Tsipras Blink Again?

Unpopular measures, even precautionary ones, have taken a toll on the government’s popularity. Main opposition group New Democracy leads with 26.8 percent, compared with 17.8 percent for Tsipras’s Syriza ruling party in an Alco survey of voting intentions on January 20.

Even though Tsipras dismisses the prospect of snap elections, he may not have a choice if Greece faces the prospect of a default in the summer. In that case, he could campaign against creditor demands, therefore putting the country’s place in the euro area at risk.

Why Doesn’t the IMF Leave?

The current European program is based on the explicit commitment of the IMF to join. If that changes, approval of further funding may have to be put before European parliaments — particularly Germany’s — where a positive outcome is far from certain. “I would not give the advice that we should try to get the permission of the German parliament,” German Finance Minister Wolfgang Schaeuble said in Davos, Switzerland last week.
So What Will Happen?

Something has to give: EU officials involved in the talks said they hope for political intervention to the IMF so that it aligns its projections with those of European creditors and appeases its doubts about the sustainability of the program’s targets and Greece’s debt.

Otherwise, Germany and the Netherlands would have to agree to fund Greece’s program without IMF oversight. The IMF hasn’t disbursed any loans to Greece since 2014 anyway, and there’s the Spanish precedent of IMF involvement in a bailout solely in an advisory capacity. Schaeuble floated the idea of transferring oversight for the Greek program to the ESM, before backtracking.

Finally, Tsipras, who’s in the weakest position of all, could be forced to bite the bullet and abide with IMF demands. None of the three outcomes is certain, however.

Source: Bloomberg