Euro zone lenders and the International Monetary Fund remain far apart on how to provide debt relief for Greece, but officials hope euro zone finance ministers will still be able to hammer out an agreement at their May 22 meeting.
Debt relief is key because the IMF has made it a condition if its participation in the latest bailout for Greece, the third since 2010. Furthermore, some euro zone governments could make the IMF’s participation a condition for new loan payouts.
Euro zone deputy finance ministers and treasury officials who prepare for Eurogroup ministerial meetings met on Monday evening to discuss how to firm up last year’s highly conditional promise of debt relief for Athens to satisfy the IMF and ease the task for the ministers next week.
But the meeting made no progress, officials said.
“There are still significant gaps on the issue of debt relief. The (deputies group) was never likely to close this gap. It will have to happen at a higher level,” one official said.
A group of north European countries led by Germany wants the IMF to join for credibility reasons, believing the European Commission’s approach toward Athens can be too lenient.
The same countries, however, oppose a firm commitment of debt relief for Greece, fearing the disapproval of bailout-weary voters at home. They are also concerned that once Athens gets a debt deal, it would lose the incentive to continue reforms.
“The IMF wants maximum (debt relief) commitment upfront, while others would prefer to be more precise only in 2018,” a second official said, referring to the end of the third bailout in mid-2018, by which time lenders would have full view of Greek reform completion and the latest economic data.
Greece, meanwhile, is saying it has met its obligations — agreeing more cuts in pensions, for example, and having a relatively large primary budget surplus, not including debt repayments last year.
It is so keen to get on that it has tentative plans for a return to bond markets as early as July.
The debt relief discussion is based on a promise made by the Eurogroup in May 2016 to extend the maturities and grace periods on Greek loans so that Greek gross financing needs are below 15 percent of GDP after 2018 for the medium term, and below 20 percent of GDP later.
The Eurogroup also said they could consider replacing more costly IMF loans to Greece with cheaper euro zone credit and transfer the profits made from a portfolio of Greek bonds bought by euro zone national central banks back to Athens.
But all this could happen only if Greece delivers on its reforms by mid-2018 and only if an analysis shows Athens needs the debt relief to make its debt sustainable.
The IMF believes that debt relief, or at least a clear promise of it now, is needed to restore investor confidence in Greece, especially if the country, which has public debt of 197 percent of GDP, is to return to market financing next year.
Greek debt to GDP has actually risen during the various bailout periods, primarily as a result of sinking GDP brought on at least in part by the austerity demanded by lenders.