Euro zone, IMF split over how much Greece needs to reform

Reuters

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The Greek (L) and European Union flags are seen behind a stop sign in front of the Greek embassy in Vienna, Austria, February 25, 2016. Photo: Reuters/Leonhard Foeger
The Greek (L) and European Union flags are seen behind a stop sign in front of the Greek embassy in Vienna, Austria, February 25, 2016. Photo: Reuters/Leonhard Foeger

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Euro zone lenders and the International Monetary Fund disagree over how much more Greece needs to do to reform its economy, a dispute that may delay new payouts and the start of debt relief talks, officials said.
Greece has been kept afloat since 2010 by IMF and euro zone bailouts. The lenders have disagreed in the past, but they have managed to resolve their issues before they got much publicity.
But after Athens had to ask for a third bailout last year, officials said that some in the IMF wanted to stay out of yet another program unless they were sure it would get Greece back on its feet.
"The main problem now is disagreement between the institutions, because that will harm the credibility of any solution," one senior official said. "They must get their act together and agree on a scenario and on policy measures."
IMF and euro zone officials hope to reach a compromise on Greece in talks this week, before a meeting of euro zone finance ministers on Monday. Senior officials from both sides are to meet for dinner on Wednesday in Brussels to discuss the issue.
Until the euro zone and the IMF agree, they cannot decide if Greece has met the first requirements for the payout of new loans. Nor can the euro zone start discussions with Athens on debt relief that would help make Greece's huge debt sustainable.
Greece has no major debt redemptions due until July, giving the lenders and Athens time to find a compromise. But the drawn-out talks undermine investor confidence.
"If we now enter a cycle of whether this review will be concluded or not, it will generate the kind of insecurity we more or less had last year ... with the loss of confidence and capital flight," a third official close to the lenders said.
The dispute focuses on what the country needs to do to reach a 3.5 percent primary surplus in 2018 and keep it there so that it no longer has to borrow from other euro zone governments to remain solvent.
Officials said the IMF had a more cautious outlook than euro zone institutions on Greek economic growth and fiscal performance, as experience showed Athens underperformed targets.
The IMF believes Greece's primary surplus in 2018 will be around 2 percent with the current reforms. Growth will be about a percentage point lower than forecast by the euro zone. Greece should therefore be more ambitious with reforms, especially with the most politically difficult, pension reform.
Reforms not enough
Yet Greece's commitments are spelled out in a memorandum of understanding (MoU) it signed with the euro zone in August. It says the pension reform will deliver savings of 1 percent of gross domestic product in 2016. The draft reform prepared by Athens does that.
The IMF was involved in talks on the memorandum, but did not sign off on it and is not formally part of the bailout. It says the numbers don't add up.
"To reach its ambitious medium-term target for the primary surplus of 3.5 percent of GDP, Greece will need to take measures in the order of some 4-5 percent of GDP," the IMF's head of the European department, Poul Thomsen, wrote on his blog on Feb 11. "We cannot see how Greece can do so without major savings on pensions."
The pension reform could be less ambitious and the 2018 primary surplus lower if the euro zone offered Greece greater debt relief, Thomsen said.
That would irk some in the euro zone who have to maintain similar surpluses to keep debt sustainable or who, like the Baltics or Slovakia, find it difficult to justify Greeks getting bigger pensions than their own citizens.
Another snag is that the IMF wants debt relief to solve the issue once and for all. The euro zone wants a staggered scheme, linked to conditions over time.
While the IMF is not formally part of the third bailout, the euro zone would very much like it to be. But the Fund will not join unless their views align.
The approval of the IMF is also a must for northern European countries like Germany, Austria or Finland, which believe the European Commission is too lenient towards Greece and too optimistic with forecasts.
"The Germans and others are warning the Commission that the conditions for concluding the review have to be sufficient to bring the Fund on board," a fourth official said.
"The French are supporting the Greek view that the MoU conditions alone should be the criteria for concluding the review," the official said.

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