IMF insists, Eurozone resists, crisis persists: a look ahead to today’s Eurogroup

Debt relief is the main agenda item. In its latest Debt Sustainability Analysis (DSA) published yesterday, IMF pointed out that Greek debt is unsustainable. Without debt relief, the debt-to-GDP ratio – currently at around 180% of GDP and the second-highest globally after Japan – is projected to rise to 250% by 2060, though with debt reprofiling including maturity extensions, payment deferrals, and fixing of interest rates, the ratio might fall to 100% over the same period. Cebr broadly accepts this analysis, though since much of the debt is on concessionary terms, the sustainability of a given debt/GDP ratio might be greater than usual.

But while the IMF is using its negotiating position to persuade the Eurogroup to make concessions, Cebr warns against premature optimism that today’s meeting will mark ‘the end of the Eurozone crisis’. IMF policy is determined by its shareholders (represented by the board), rather than its staff. Politics matter much more to the former. And there is little enthusiasm in Germany for debt relief which would be hard to sell to the country’s voters.

On the other hand the Eurogroup will be unwilling to risk a crisis that could break up the Euro in the run-up to the UK Brexit vote on 23 June and the Spanish elections on 26 June, so arguably today’s meeting is the IMF’s best chance to use its negotiating power to force the concessions it believes are necessary.

Looking ahead, we see two main scenarios :

1. The IMF backs off and avoids confrontation with the Europeans. This would continue the “extend and pretend” strategy that has governed the Greek crisis since it started. This wouldmost certainly be bad for the Greek economy, as the IMF staff’s projections show. And, it could prove very damaging to Europe as it raises the likelihood of a default and Grexit further down the line – meaning that debt owed to European taxpayers (including in the UK) would never be repaid.

2. The IMF plays hardball and poses a painful dilemma to the Europeans. This would certainly be risky. A failure to agree could lead to another Eurozone crisis, possibly a Grexit. But it is in everyone’s interest that this is avoided. The debt relief itself need not take the form of an outright haircut. Some form of reprofiling, as outlined in the IMF’s DSA could do the trick. This would put the Greek economy on a more sustainable trajectory but would be costly politically to Eurozone leaders and may lead to political instability in the already-troubled union.

Danae Kyriakopoulou
Managing Economist

IMF insists, Eurozone resists, crisis persists: a look ahead to today’s Eurogroup

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