The IMF is on the right side of its argument with the EU and ECB – however politically painful its answer might be
Caricatures normally paint the IMF as the hard guy, the one who insists that sour austerity medicine is taken on time and in full. By contrast, the EU and the ECB are the softies who roll over in the end and agree a compromise.
If you ignore the detail of the current spat within the so-called troika, these pen portraits fit. Christine Lagarde and the IMF think the 2020 deadline for reducing Greece's debt-to-GDP ratio to 120% should be kept. The EU politicians think an extension to 2022 is in order on the grounds that Athens is doing a reasonable job in cutting spending and raising taxes.
On this occasion, however, the details matter – and they should prompt the caricatures to be redrawn. The IMF is asking the right question: what's the best way to help Greece? It is also drawing the correct conclusion: only a write-off in Greece's debts will make a serious difference to the country's economic health and it's time creditors acknowledged that reality.
For EU politicians, such talk is highly dangerous. They have elections to win – Germany's falls next September and the chancellor, Angela Merkel, has promised not to lose money on past bailouts. Making governments and the ECB accept losses on loans to Greece sounds like heresy, especially if markets get the idea that something similar could happen one day in Spain. So it's deemed better to stick to the line that Greece can make it to 120%, albeit two years behind schedule, and thus allow the next round of funding to proceed.
But Greece won't make it by then. Cast your mind back to the official forecasts at the time of the first Greek bailout in 2010. Then, it was imagined that Greece's debts would peak at 150% of GDP in 2013. Now the official forecasts say the top will be 192% in 2014. That's the scale of the miss.
Greece is making sterling efforts to achieve a meaningful primary budget surplus (meaning before interest payments). The problem is the size of the debt. It's simply too big. Political games of "extend and pretend" risk the worst of all outcomes – a deterioration in Greece's debt dynamics, making the eventual write-off even larger. The IMF is on the right side of this argument: however politically painful, official lenders to Greece should take a haircut.
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