Showdown likely to come to a head next month when report set to confirm Greece's debt could hit 145% of GDP by 2020
The eurozone and the International Monetary Fund are engaged in a dangerous game of brinkmanship over how to respond to a Greek bailout that is going off the rails.
It is now clear that Athens is highly unlikely to achieve the key IMF benchmark on the rescue of getting its national debt down to a "sustainable" 120% of gross domestic product by 2020.
The word in Brussels, based on assessments from the troika of European commission, European Central Bank and IMF officials scrutinising Greece's compliance with the bailout terms, is that Athens could overshoot the sustainability target by as much as 25% on current trends, begging the question of whether the IMF will remain a party to the rescue. Figures circulating in Brussels estimate Greece's national debt will be between 130-145% of GDP by 2020 on current trends.
The showdown between the eurozone and the IMF is being described as eyeball-to-eyeball, a shouting match, and a contest to see who will blink first. It is expected to come to a crunch next month. The IMF is insisting that the eurozone and the ECB resort to a new policy of OSI, Official Sector Involvement, meaning a writedown or writeoff of Greek debt to its official creditors, a move that the ECB and the German government are resisting fiercely.
EU leaders meeting in Brussels for a summit next week are likely to shelve the problem, arguing that they need to wait until next month for the troika report on Greece before deciding their next moves. Greece needs a bailout disbursement of over €30bn (£24bn) next month, without which it will go bankrupt. It is certain to get the money, it is said in Brussels, since, following chancellor Angela Merkel's fraught visit to Athens this week, no one in the eurozone or in Washington wants to let Greece go bust or exit the common currency.
The disbursement decision will be left to eurozone finance ministers rather than the EU summit which next week will shower Antonis Samaras, the Greek prime minister, with praise for the efforts he's making to tackle the crisis.
Next month's crucial troika report will concede that Greece will not make the 2020 debt sustainability target, it is understood. The IMF is insisting that this admission should trigger a discussion among Greece's creditors over how and whether the €30bn-plus disbursement should be made, but the Europeans are seeking to decouple the two issues.
With a funding gap opening up in the Greek bailout trajectory of up to €30bn, the IMF is said to be arguing that the Europeans should foot the bill by writing down Greece's official debt. Other ideas being mulled over are to "extend" the €130bn bailout (Greece's second) or concoct a third rescue, all deeply unattractive options for Merkel who would need to return to an increasingly recalcitrant parliament in Berlin in an election year.
The row comes as divisions open up in public between the IMF and euro leaders over the merits of austerity, after an IMF study released this week found that it had underestimated the impact that fiscal cutbacks have on economic growth. This study has been rebuffed by some eurozone leaders, with commissioner Olli Rehn arguing that it would be a mistake to change course. "The EU cannot be making swift turns, rather it is a convoy and you have to carefully consider which policy turns are best," Rehn said.
For Lagarde, though, the issue is clear. She reiterated on Friday that Greece should be given "a bit more time" to hit its targets.
Martin Koehring of the Economist Intelligence Unit argued that Greece must be given more debt relief, as the IMF cannot keep lending to Athens without a realistic prospect of debt sustainability.
"If the IMF were to withdraw from the Greek bailout deal, this could herald the collapse of the whole rescue mechanism for Greece and other vulnerable countries," Koehring added.
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