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Why the IMF is wrong on a Greek debt haircut

With Greece on the verge of receiving yet more aid from its international creditors, thanks to German lawmakers overwhelmingly backing the deal Wednesday, experts have challenged assertions from the International Monetary Fund (IMF) that the country's debt is unsustainable without a massive restructuring.

Volker Wieland, a member of the German Council of Economic Experts and chair of monetary economics and managing director of the Institute for Monetary and Financial Stability (IMFS) at Goethe University, told CNBC Wednesday that any relaxation in the payments by Greece would not be urgent.

"The cost of bearing the debt is very low for Greece, precisely because much of the interest and repayment has already been postponed. The only debt which is particularly expensive, except for short term bills, is the IMF debt," he said.

International Monetary Fund (IMF) Managing Director Christine Lagarde (L) listens to Greek Finance Minister Yanis Varoufakis during an extraordinary euro zone finance ministers meeting to discuss Athens' plans to reverse austerity measures agreed as part of its bailout, in Brussels February 11, 2015.
Francois Lenoir | Reuters
German Finance Minister Wolfgang Schaeuble and former Greek Finance Minister Yanis Varoufakis.
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The euro zone has agreed to lend Athens another 86 billion euros ($95 billion) in a new bailout program that was ratified by Germany and The Netherlands Wednesday. The Greek finance ministry told Reuters that the board of the European Stability Mechanism, the euro zone's bailout fund, will have a teleconference Wednesday evening to approve the first installment of bailout money.

One issue surrounding the latest negotiations is the involvement that the IMF will have, with the organization continuously stating that Greece's debt is unsustainable and needs relief on its existing borrowings.

Germany has traditionally has been resolutely against any debt restructuring for Greece with the country's politicians usually taking a hard line on austerity too.

It might be no surprise that Wieland has these views, but he's not alone. Daniel Lacalle, the chief investment officer at Alpha Strategy, told CNBC Wednesday that the problem for Greece has nothing to do with debt unsustainability.

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"Another haircut is going to do nothing for the Greek economic situation," he said.

"(Greece has) lower cost of debt than the average of the European Union, they pay less than 3 percent of their GDP (gross domestic product) in terms of interest. They have longer periods of maturity."

He added that the real challenge for Greece was its competitiveness and its productivity.

"It's a question of one of the worst countries in terms of ease of doing business. They have to do something about structural reforms at some point which is what governments have never wanted to do and this one is no different, and that's a problem," he said.

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Brussels-based economic think tank Bruegel has delved into the numbers and report that in the period 2015-2020, Greece will not pay more than 2.6 percent of GDP in annual interest, about the same as France. In a report in June, it added that the focus is often wrongly on headline debt-to-GDP numbers instead of the actual burden of public debt on the Greek economy.

European officials - like Germany's Wolfgang Schaeuble on Wednesday - like to reiterate that nominal haircuts on official debt cannot be undertaken and are against the laws of the European Union. However. there are blurred lines when it comes to the difference between a haircut and the idea of a restructuring. A haircut is usually described as a reduction of the amount that will be repaid to creditors. At the height of the euro zone debt crisis in 2012, a 50 percent haircut was imposed on private bondholders of Greek debt.

Speaking in German Parliament on Wednesday, Schaeuble said that he was confident that a joint view could be agreed on Greek debt sustainability in October. Thus, it could be churlish to rule out any further postponement of interest payments or timeframes for the debt-stricken country.

Correction: This article has been updated to reflect that Volker Wieland is a member of the German Council of Economic Experts and chair of monetary economics and managing director of the Institute for Monetary and Financial Stability (IMFS) at Goethe University.

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