Greek debt — a riddle, wrapped in a mystery, inside an enigma

November 16, 2012

So said Winston Churchill of Russia. The Greek debt saga isn’t quite that unfathomable but the economic necessities continue to clash with the political realities.

Eurogroup Working Group – the expert finance officials from 17 euro zone nations who do the clever preparatory work before their finance ministers meet – will convene to today try and get the Greek debt process back on track after a ministerial meeting got nowhere on Monday and in fact ended up in an unusually public spat between its chair, Jean-Claude Juncker, and IMF Managing Director Christine Lagarde.

The Eurogroup plus Lagarde will meet again next Tuesday and there are big gaps to bridge although we intercepted the IMF chief in Manila this morning, insisting that a deal was possible, or at least that’s one way of reading her “it’s not over until the fat lady sings” quote.

The IMF wants a durable solution while euro zone policymakers are already looking at something just to get them through the next two years. That reflects a more fundamental split – Lagarde thinks the ECB and euro zone governments have to take a hit on their Greek debts, Germany and others refuse to countenance that. There were some interesting cracks in that façade yesterday, though, with both ECB policymaker Coene and Italian finance minister Grilli saying a writedown could be needed.

By seeking a deal only to tide Greece over to 2014, euro zone ministers could be tacitly acknowledging that that’s the case, while bowing to the political reality that there’s no way it can happen until German Chancellor Angela Merkel seeks re-election in the autumn of next year.

But will the IMF wear another fudge? That the Greek numbers do not add up is in little doubt, not least after data showed this week its recession, make that depression, deepened yet further in the third quarter. A further debt write-off is almost certainly needed if Greece is ever to get back on track. The question is one of timing.

Extending maturities and cutting interest rates on Greece’s international loans is very much on the table but the question is whether that will be enough for the IMF. It almost certainly won’t be enough to shift the Greek debt numbers decisively. The Fund’s rules dictate that it cannot go on disbursing loans unless an adjustment programme is fully funded up to the end and Greece has just been given an extra two years to make the cuts demanded of it, which its troika of lenders leaves a 32 billion euros funding gap, which will have to be filled.

In the end, it’s unlikely the IMF will walk away, having stumped up a third of the money for Greece’s two bailouts, but it’s not impossible and if it did, it would deal a mortal blow to the euro zone’s credibility and quite possibly trigger the sort of market attack not seen since the ECB pledged to buy euro government bonds in potentially unlimited amounts.

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