The International Monetary Fund believes that the only way to reduce Greek debt to a sustainable level is by way of a debt haircut involving the country's government creditors. But with an election approaching, Germany has refused to consider the proposal. Reality is on the IMF's side.
By SPIEGEL Staff
An elegant appearance is important to Christine Lagarde. The head of the International Monetary Fund (IMF) wears her short hair carefully coiffed, and diamonds glitter on her manicured fingers. When she talks about global financial issues, she hardly ever raises her voice. Her colleagues at the Washington-based financial authority call her "Ms. Perfect."
But last Tuesday Lagarde, who was once French finance minister, was having trouble keeping her composure. She had hurried back to Europe from Asia to attend the latest in a series of Euro Group crisis meetings on Greece. And even though she had a fever and felt weak from the flu, she began to raise her voice as she spoke. For Greece to recover, she insisted, creditor countries would have to forgive the government in Athens a large share of its debt. "Nothing else will work," Lagarde said.
But the group, most notably Germany's impassive Foreign Minister Wolfgang Schäuble, from Chancellor Angela Merkel's Christian Democratic Union (CDU), refused to budge. The meeting ended unsuccessfully at around 5 a.m. and was adjourned until this Monday.
It is something of a paradox. Originally, Germany was the primary backer of IMF involvement in efforts to save the euro, primarily because of the group's experience, as Merkel repeatedly emphasized. Schäuble, for his part, said at the time: "There is no institution worldwide that has a comparable level of expertise."
Now, however, it is Berlin that has shown the greatest resistance to Lagarde's approach to the crisis. The reason is simple: If the Greek government were in fact forgiven a portion of its debt, Germany would have to write off billions in aid loans. It would mark the first time that Greece's crisis actually cost German taxpayers money, a novelty that Merkel and Schäuble would like to avoid on the eve of an election year.
Refuses to Change Approach
As such, their resistance to Lagarde's proposal runs deep. For the IMF it is a question of truthfulness and economic good sense, for Germany's current leadership, the coming campaign takes priority.
In the private economy, it's considered a crime to delay an unavoidable bankruptcy. Merkel and Schäuble, however, are determined to do just that, adopting a stance that could have drastic consequences for the Greek government and its economy. With the country's mountain of debt remaining unsustainably high, the government has been forced into intensifying its austerity policies. Meanwhile, the situation in Greece is scaring away private investors. But instead of providing Athens with the perspective of economic improvement in the foreseeable future, the Euro Group refuses to change its approach.
Not surprisingly, relationships are beginning to sour. Last week, Lagarde -- who was once among Schäuble's favorite colleagues -- lectured the German finance minister in no uncertain terms. If you want to keep Greece in the euro zone, Lagarde said, you have to be prepared to pay the price.
The numbers at the group's disposal were hardly ambiguous. The Germans want to address Greece's dismal debt situation with a number of accounting tricks and lower interest rates in an effort to find the €32 billion in funding necessary between 2014 and 2016 now that Athens has been given an extra two years to meet its budgetary targets. But even should all of the proposed measures be implemented, the shortfall could not be offset, according to Euro Group meeting documents. Furthermore, the package of mini-measures would not even come close to the target of reducing Greece's sovereign debt load to 120 percent of gross domestic product by 2020.
The Euro Group has proposed granting Greece extra time to hit the sovereign debt target as well. But Lagarde has refused to budge, saying that IMF statutes would prohibit further aid were the target to be watered down. As such, given that Greece will be unable to reach the target on its own, European creditors have little choice but to forgive a portion of the debt they hold, Lagarde insists. She reminded the group of ministers that it was not the IMF that had defined the goal and timing of the rescue program, but rather the leaders of euro-zone member states. "We can't delay everything at our convenience," she said.
Lagarde was particularly upset with Schäuble, whom she had addressed as "my friend Wolfgang" at his 70th birthday party in September -- because he, of all people, had left her high and dry.
A Surprise from Schäuble
A day earlier, on Monday of last week, Lagarde met with the key players in the Greek bailout in Paris. The French finance minister hosted the meeting, which also included Lagarde and the finance ministers of Italy, Spain and Germany. Experts from the European Commission, the European Council and the European Central Bank (ECB) were also present.
Lagarde said that she would be willing to give Greece more time to service its debt, as requested by Germany and other countries. In return, she demanded a drastic cut in the interest rates collected by the euro countries for their bilateral loans to Athens. According to several meeting participants, Schäuble agreed to go along with such a cut.
This could reduce the Greek debt burden by 6 percent over the next 10 years, a real improvement from the standpoint of the IMF. When the meeting ended, participants felt they had worked out a concrete proposal for the meeting with other euro-zone finance ministers set for the next day.
But when the meeting of the Euro Group began last Tuesday at 5 p.m., the ministers were in for a surprise. Suddenly Schäuble was only willing to agree to a moderate reduction in the rates on bilateral loans to Athens. In the meantime, he had spoken with Merkel, who was worried about those in her coalition government who are skeptical of the Greek bailout. Schäuble's change of position meant that the debt target that was so important to the IMF was up in the air once again. The Germans are becoming unreliable, one minister moaned.
The unpleasant haggling that ensued was something even long-serving Brussels officials had rarely experienced. Whenever an idea was proposed, the representative of one country or another had an objection. The Dutch minister rejected a proposal to buy back Greek bonds, and the Slovenians bridled at longer terms and interest rate reductions for loans from the European Financial Stability Facility (EFSF). ECB President Mario Draghi said he was opposing to buying any more short-term government bonds from Greek banks.
Late in the evening, Lagarde finally put her foot down. "I have rules that I must adhere to," she said, and threatened that the IMF would withdraw from the Greek rescue effort, if necessary. "If you want the IMF to remain part of this, you'll have to do something."
'A Disaster on Our Hands'
The meeting was adjourned once again. European Commissioner for Economic and Monetary Affairs Olli Rehn, Euro Group President Jean-Claude Juncker and his most important official, Thomas Wieser, from Austria, tried to convince Schäuble to change his mind. "If Germany doesn't move, the meeting will be a failure," one of them warned. "We'll have a disaster on our hands!" said another.
Now it's up to Commissioner Rehn to find a compromise as quickly as possible. He is appealing to leaders of euro-zone member states, Germany in particular, to fulfill their pledge to rescue Greece. "Everybody must reconsider his red lines," says Rehn.
Most economists feel that forgiving the ailing country at least a portion of its debt is unavoidable given the extreme interest rate costs associated with that debt. Even if Athens were to achieve the targeted debt level of 120 percent by 2020, the country would still have difficulties financing itself.
Denying Athens a partial default, on the other hand, would essentially condemn the country to further austerity measures. Already, however, Greece has slashed its budget to a degree never before seen in an industrialized country. The consequence is an ongoing recession that results in an ever growing pile of sovereign debt. Further cuts would only accelerate this vicious cycle.
Finding foreign investment in such a climate is almost impossible. Instead of creating the basis for a new beginning, the current bailout policy is achieving the opposite effect: eroding the country's economic base.
Schäuble knows this. Nevertheless, he is resisting the unavoidable and has been hiding behind specious explanations for several weeks. A lawyer by profession, Schäuble likes to point out that forgiving Greek debt is legally impossible. According to Schäuble, the federal government's budget rules require that new loans can only be issued if payback is realistic. He argues that, should Greek default on a portion of its debt, it would make it impossible to issue new loans to the country.
It sounds logical enough, and yet it has little to do with the economic and political reality. After all, if a country's debt load exceeds a sustainable level, payback becomes even more unrealistic. The German government has long recognized the conundrum in the context of its development policy. Indeed, Berlin periodically forgives some of the loans made to highly indebted countries if they introduce reforms. In return, they receive fresh funds to pay for a new beginning.
This could also work in Greece, but Germany isn't interested. Instead, they come up with bizarre calculations. At Germany's request, for instance, the troika -- made up of the IMF, the European Commission and the European Central Bank -- is to assume in its current report that Greece will achieve a so-called primary surplus of at least 5 percent as of 2016. This key number indicates the size of the budget surplus prior to interest payments. Experience shows that a value of 4.5 percent is more than optimistic, and IMF experts see anything higher than that as wishful thinking.
The troika calculations already seem completely unrealistic. In estimating the ability to carry debt, the experts assume that the Greek economy will return to annual growth of 4 to 5 percent after 2014 should all reforms be implemented.
Germany has become used to getting its way among euro-zone leaders. But it now faces growing resistance. Senior troika representatives, including ECB Executive Board member Jörg Asmussen, Thomas Wieser, the president of the Euro Working Group, and IMF representative Paul Thompson, are campaigning for a debt haircut, especially among smaller member states. Their goal is to reduce Greece's 2020 debt level from the 144 percent of GDP that it would likely be without any kind of debt forgiveness, to just 70 percent. To achieve the latter number, creditor countries would have to waive half of their claims.
Such a step would relieve Greece from its burdens and give it the ability to refinance itself on its own once again. Nevertheless, it is unlikely that the Brussels illusionists will recognize this reality on Monday. Once again, the real numbers aren't likely to make an appearance at the table.
The Search for Sustainability
Much will depend on how IMF Managing Director Lagarde behaves. Only a few days ago, on her trip through Asia, she made it clear that she isn't interested in a quick but rather a "sustainable solution" to the Greece problem. "For one, I would like to give my blessing to a program for Greece that isn't based on wishful thinking. Second, I want to preserve the integrity, credibility and quality of out advisory activity."
Nevertheless, Lagarde has already made it clear that the IMF will not leave the negotiating table. A balance of terror is in place. If the IMF were to exit, the entire euro rescue would be a failure, because it would mean that other players, like the ECB, would also have to get out. And because everyone knows this, it won't happen.
But whatever the Euro Group decides to do now, it will not last until the German parliamentary election in September 2013, as Merkel and Schäuble would like. One senior official involved in the talks ventured a sober prognosis: "In the spring, we'll have to revisit this junk again."
BY SVEN BÖLL, MARC HUJER, CHRISTOPH REIERMANN, CHRISTOPH SCHULT and ANNE SEITH
Translated from the German by Christopher Sultan