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Greek drama takes center stage at IMF meeting

Will the IMF's spring meeting in Washington this weekend be yet another episode in the ongoing Greek debt saga that has mired the euro zone?

After about two months, the talks between Greece and its creditors on the first Greek program review are lagging, as demonstrated by the latest, fruitless round of negotiations that provisionally ended on Tuesday and will resume after April 18. With Greece gradually running out of liquidity, Prime Minister Alexis Tsipras and his Cabinet are beginning to feel the pressure.

Greek Prime Minister Alexis Tsipras
Milos Bicanski | Getty Images
Greek Prime Minister Alexis Tsipras

The gridlock is due mainly because of differences among the lenders over the country's projected fiscal shortfall by 2018: It was initially seen at 3 percent by the EU, and 4.5 percent by the IMF. Another sticking point: pushback from Athens on unpopular austerity measures, including cuts in pensions and a rise in taxes.

All eyes will be on how the IMF; European Central Bank; European Stability Mechanism, the euro zone's bailout fund; and EU will try to come together to avert another Greek crisis. The aim is for Greece and its creditors to reach an agreement by May 1; otherwise, the situation will become unbearably stressful.

"All four institutions are working intensively together with the Greek authorities on an ambitious policy package aiming at supporting growth, job creation and the competitiveness of the Greek economy. This will form the basis for both the conclusion of the first review between the Greek authorities and the European institutions and a new program with the IMF," an ECB spokesperson said Tuesday.

Equally important are the preparatory discussions between Europe and the IMF on the Greek debt, which the European Commission estimates will reach 185 percent of GDP in 2016. The debt-relief issue will determine the fund's financial participation in the Greek adjustment program.

In the IMF's latest Debt Sustainability Analysis — from nine months ago — it is noted that "the dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date and what has been proposed by the ESM." In any case, the IMF expects Europe to take the initiative.

(L-R) German Chancellor Angela Merkel, International Monetary Fund (IMF) Managing Director Christine Lagarde, European Commission President Jean-Claude Juncker, European Central Bank President Mario Draghi, French President Francois Hollande, Greek Prime Minister Alexis Tsipras and Spanish Prime Minister Mariano Rajoy attend a Eurozone emergency summit on Greece in Brussels, Belgium, June 22, 2015.
Yves Herman | Reuters
(L-R) German Chancellor Angela Merkel, International Monetary Fund (IMF) Managing Director Christine Lagarde, European Commission President Jean-Claude Juncker, European Central Bank President Mario Draghi, French President Francois Hollande, Greek Prime Minister Alexis Tsipras and Spanish Prime Minister Mariano Rajoy attend a Eurozone emergency summit on Greece in Brussels, Belgium, June 22, 2015.

IMF Managing Director Christine Lagarde has repeatedly underlined that Europe needs to understand that Greece's debt is "too heavy."

"Europeans have to be sensible on how much debt burden the country can carry," she stated April 7 while suggesting debt relief through extending maturities and lowering interest rates. IMF's sustainability model for Greece reportedly revolves around further extending maturities to more than 70 years, setting a 30-year grace period for interest payments and adjusting the interest rate to the real capacity of the Greek budget.

But Europe — and Germany, in particular — has a different approach. Germany's finance minister, Wolfgang Schäuble, told German television network ARD that while there will be a solution for Greece within the next few weeks, it will not include debt relief. He pointed out that Greek maturities have been extended to 35 years and interest payments have been postponed for 10 years.

Despite German proclamations, the European Stability Mechanism has already worked on debt-reduction draft plans under the assumption that Greece's annual gross financing needs — the money the country must raise to cover its deficit — remain below 15 percent of GDP annually. To achieve this, the ESM draft plan is to extend the maturity of some of Greece's loans, linking fixed debt repayments to the country's gross domestic product and capping or deferring interest payments. But as mentioned before, this debt-reduction draft plan does not satisfy the IMF.

But the Greek delegation is not going to the IMF's spring meeting with the best of intentions. While Prime Minister Alexis Tsipras is expected to make painful concessions to reach a definitive solution before the Eurogroup meeting next week, market watchers predict he will blame the IMF for his country's worsening economic woes since the fund has taken the toughest stance on structural reforms.

Today, Benoît Coeuré, a member of the executive board of the ECB, supported the IMF's policies. "We fully agree with the IMF on the need for a strong policy package. The aim of this discussion is the conclusion of the first review of the new program," he said.

The Greek government has criticized IMF forecasts, suggesting that the fund's latest, pessimistic debt and GDP projections are largely driven by its unwillingness to participate in the program. The Greek government argues that historically they have been off the mark. In 2011 the IMF projected a –2.6 percent GDP growth rate for recession, when it turned out to be –7.1 percent; the following year it projected GDP to hit 1.1 percent, but it declined –6.6 percent. Last year the IMF projected GDP would stabilize at 2.1 percent, but the economy shrank by –3.3 percent.

"What we are seeing is jockeying for position in the negotiations," George Papakonstantinou, Greece's former Minister of Finance told CNBC. "The IMF cannot sign off on a program without some relief, and the German government needs the IMF on board for disbursement to be approved by the Bundestag," he added.

The IMF's former alternate executive director, Thanos Catsambas, estimated that the fund's stance toward Greece depends on timing. "The debt issue becomes relevant after 2022. It is possible that the IMF may participate in, say, a three-year program without reference to what will happen after then. But of course, its own conditions must be met first — notably, elimination of the fiscal gap," he told CNBC.


CNBC asked Papakonstantinou, who negotiated Greece's bailout deal with the IMF in 2010, whether this year's meeting is as important as the one he participated in six years ago.

"The 2010 IMF spring meeting marked a number of firsts for the fund. It was the first time it was being called to assist in the rescue effort of a euro zone country, and the first time it would commit such a large sum of 30 billion euros to do so. It also was the first time it relied on two important policy levers when assisting a country: debt restructuring and currency devaluation. Those decisions have been heavily criticized; however, they were instrumental in avoiding a Greek default and the collapse of the euro," he stated.

According to Papakonstantinou, "This week's meeting may not be as momentous as in 2010, but it is nevertheless important. Greece's euro zone partners need to be convinced that some sort of debt relief will be necessary if confidence in the country's future economic prospects is to be restored," he said.

It remains to be seen whether the IMF will decisively intervene this time to remove the uncertainty that the Greek debt burden causes to investors, or will once again postpone the necessary solutions through compromises with the Europeans.

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— By Nasos Koukakis, special to CNBC.com