The International Monetary Fund is asking Europe to approve an ambitious debt relief plan for Greece, its most substantial move yet to ease the terms of loans that are widely viewed as untenable.
The IMF’s proposal, the details of which the Wall Street Journal reported on Tuesday, marks the beginning of an intense negotiation process aimed at avoiding a replay of last summer’s crisis when Greece, brought to the brink of economic collapse, was nearly forced out of the eurozone.
Greece faces a major debt repayment deadline in July, which it may not be able to make, raising the possibility of another round of high-stakes brinksmanship.
Under the IMF's plan, the earliest loans issued by the eurozone nations wouldn't be due for repayment until 2040. The plan would also freeze the interest rate on those loans at 1.5 percent for 30 to 40 years, according to the Journal.
The Journal characterized the proposal as an “opening bid,” given the certainty of German opposition to it in its current form.
The political leaders of Germany, the eurozone’s most powerful nation and Greece’s single largest sovereign lender, are deeply resistant to the idea of restructuring Greece’s debts. Not surprisingly, Germany's hardline finance minister Wolfgang Schaüble has already rejected the proposal out of hand.
The prospect of German taxpayers sustaining greater losses on loans to Greece is unpopular and raises the threat of political turmoil. The dominant center-right party of chancellor Angela Merkel is already confronting the resurgence of a hardline populist party sparked by the country’s welcoming policies toward refugees.
The IMF, however, has consistently argued that Greece will never be able to repay its debts to eurozone nations and resume financial independence, let alone recover economically, if it does not receive more debt relief.
That difference of opinion was evident in the IMF’s projection of how Greece’s economy will perform in the coming years, which is much more pessimistic than that of the eurozone.
Germany has typically called the shots in negotiations related to Greece. But the IMF has one trump card: its very participation in the bailout program.
The IMF’s hand in the bailout was crucial to securing German political support for emergency loans to Greece to begin with, since the Fund is viewed as a stricter and more capable enforcer of fiscal reforms than the various European government bodies. If Germany does not compromise on debt relief, the Fund could withdraw from the arrangement altogether.
Whether the IMF is willing to call Germany’s bluff, however, is an open question.
“If they are really credible and sincere … then yeah, they’ll have to walk away," said Mark Blyth, a political scientist and IMF watcher at Brown University. "But given that the IMF is the writer of its own rules,” that's far from guaranteed, he said.
That the current talks center on a tactical showdown between the IMF and Germany speaks to the degree to which Greece has lost a say in the decisions that will shape its future.
Greece’s economy has shrunk by some 25 percent since 2008 in the wake of a financial crisis and a fiscal austerity regime implemented at the behest of its lenders in 2010. The resulting economic pain endured by Greece’s citizens and their elected officials' inability to do anything about it has pushed the country into a seemingly endless series of political crises.
The current Greek government, led by Syriza, a party once viewed as radically left-wing, capitulated to creditors’ new austerity demands last July after the European Central Bank shut off aid to Greece's troubled banks, effectively bringing the country’s economy to its knees.
Syriza was re-elected in September on the promise of distributing creditor-imposed austerity more equitably, but the Greek government has struggled to fend off cuts to a scaled-down pension program that plays an increasingly vital role as a source of income. Now the Greek parliament is set to vote on Sunday on a new package of tax hikes and pension cuts.
Meanwhile, new polling shows Syriza now trails its center-right rival in Thessaloniki, Greece’s second-largest city.
Blyth likened the talks between the IMF, Germany and Greece to a lopsided card game in which Greece has by far the weakest hand.
“You’ve got three guys playing poker. One of them has aces and kings, one in principle has a flush and one has two pair,” he said. “You shouldn’t even have to guess who has two pair.”