IMF says Greece needs extra €60bn in funds and debt relief

Phillip Inman, Larry Elliott and Alberto Nardelli Friday 3 July 2015

International lender issues strong message to Europe by warning that Athens’ debts are unsustainable and it needs 20-year grace period on debt repayments

A woman passes a wall covered with Vote NO campaign posters on Greece’s bailout referendum. Photograph: Fotis Plegas G./EPA

The International Monetary Fund has electrified the referendum debate in Greece after it conceded that the crisis-ridden country needs up to €60bn (£42bn) of extra funds over the next three years and large-scale debt relief to create “a breathing space” and stabilise the economy.

With days to go before Sunday’s knife-edge referendum that the country’s creditors have cast as a vote on whether it wants to keep the euro, the IMF revealed a deep split with Europe as it warned that Greece’s debts were “unsustainable”.

Fund officials said they would not be prepared to put a proposal for a third Greek bailout to the Washington-based organisation’s board unless it included both a commitment to economic reform and debt relief.

According to the IMF, Greece should have a 20-year grace period before making any debt repayments and final payments should not take place until 2055. It would need €10bn to get through the next few months and a further €50bn after that.

The Greek prime minister Alexis Tsipras welcomed the IMF’s intervention saying in a TV interview that what the IMF said was never put to him during negotiations.

Urging a no vote on Sunday he said: “Voting no to a solution that isn’t viable doesn’t mean saying no to Europe. It means demanding a solution that’s realistic.
“Either you give in to ultimatums or you opt for democracy. The Greek people can’t be bled dry any longer.”

Tsipras is campaigning for a no vote in the referendum on Sunday, which is officially on whether to accept a tough earlier bailout offer, to impress on EU negotiators that spiralling poverty and a collapse in everyday business activity across Greece has meant further austerity should be ruled out of any new rescue package.

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Greece’s finance minister, Yanis Varoufakis, pledged to resign if his country votes yes to the plan proposed by the EU, the European Central Bank and what appears to be an increasingly reluctant IMF.

Varoufakis, the academic-turned-politician who has riled his Eurozone counterparts, said he would not remain finance minister on Monday if Greece voted yes.

He said he would rather “cut off his arm” than accept another austerity bailout without any debt relief for Greece, adding that he was “quite confident” the Greek people would back the government’s call for a no vote.

The Greek government’s defiant stance came as the head of the Hellenic Chambers of Commerce, Constantine Michalos, said he did not believe Greece’s banks would be able to reopen next Tuesday without further funding, telling the Daily Telegraph he had been told cash reserves were down to €500m.

The government’s stance was attacked by former prime minister Costas Karamanlis, who said a no vote would amount to a “choice for withdrawal from the heart of Europe”.

His statement was echoed by another former prime minister, Antonis Samaras, who said going back to the drachma would kill the Greek economy.

The president of the European parliament, Martin Schulz, reflecting the deep anger felt in Brussels at the erratic negotiating tactics adopted by Tsipras and Varoufakis, said Greek voters should blame Tsipras for bringing the country to its knees.

Schulz said: “New elections would be necessary if the Greek people vote for the reform programme and thus for remaining in the Eurozone and Tsipras, as a logical consequence, resigns.”

In an outburst that was extraordinary coming from the most senior official in the EU parliament, he argued that the radical left Syriza government should be replaced by a technocratic administration.

“If this transitional government reaches a reasonable agreement with the creditors, then Syriza’s time would be over,” he said. “Then Greece has another chance.”

But the intervention by the IMF will undermine EU leaders who argue Greece must submit to a fresh round of austerity measures to release funds for debt repayments.

In a strong message to Brussels, the IMF said they would need to find extra money for Greece following the marked deterioration in the state of the economy since Tsipras’s Syriza coalition took over at the start of the year.

“Very significant changes in policies and in the outlook since early this year have resulted in a substantial increase in financing needs. Altogether, under the package proposed by the institutions to the Greek authorities, these needs are projected to reach about €50bn from October 2015 to the end of 2018, requiring new European money of at least €36bn over the three-year period.”

The fund said Greece’s financing needs had risen since it completed its study in late June, with paralysis in the economy following the imposition of capital controls last weekend.

Greece was already back in recession even before the recent deepening of the crisis and looks unlikely to meet the IMF’s forecast of 0% growth this year. The fund has been consistently over-optimistic about Greece’s economic prospects, but officials said that if the economy did contract in 2015, it would make up the lost ground in the future.

Nick Kounis, economist at ABN Amro, said: “The IMF’s report on Greek debt makes grim reading but its growth assumptions are too optimistic, hence debt projections are too low.”

The IMF said that even if Greece is offered generous terms, it is still likely to require a reduction in debt of around 30% of national income to bring it down to 117% of GDP, the uppermost limit of what the fund considered sustainable at the time of the second Greek bailout in the autumn of 2012.

“Even with concessional financing through 2018, debt would remain very high for decades and highly vulnerable to shocks. Assuming official (concessional) financing through end–2018, the debt-to-GDP ratio is projected at about 150% in 2020, and close to 140% in 2022.

“Using the thresholds agreed in November 2012, a haircut that yields a reduction in debt of over 30% of GDP would be required to meet the November 2012 debt targets.”

The IMF added that if growth was lower than expected or if the Greek government failed to meet targets for running a surplus on its budget excluding interest payments, there would be “significant increases in debt and gross financing needs”.

The IMF said that is was releasing its preliminary draft debt sustainability analysis as a result of the leaks of documents reported in the Guardian earlier this week.

Significantly, it said its assessment had “not been agreed with the other parties in the policy discussions” – an admission that the fund is at odds with its troika partners, the European commission and the European Central Bank – over the need for debt relief.

The fund has traditionally viewed debt relief as an integral part of any package to improve the economic prospects of a country seeking help, but it has met resistance from European governments fearful that the cost would have to be met by their own taxpayers.

In response to criticism that the IMF has failed to tackle intransigence in European capitals against a further debt write-off, a senior IMF official said: “We are asking the Greeks to do very difficult things. We are also asking the Europeans to do something very difficult.

“The extension of maturities [by the EU] on Greek debt would be a dramatic move.”

He said that while “it was a fact that Europe has already provided considerable debt relief in GDP terms” to Greece, the current dire situation meant they needed to do more.

The official said he had refused to put forward plans for a further bailout of Greece to the IMF board without a comprehensive deal that included debt relief.

“We cannot go to our board with this report unless we have a credible programme that is sustainable and with a policy from the EU on debt relief. We want a comprehensive solution and cannot go to the IMF board without it.”

IMF says Greece needs extra €60bn in funds and debt relief | Business | The Guardian