The Greek “cliff”

November 19, 2012

Some key positions were staked out on Greece over the weekend – ECB power-behind-the throne Joerg Asmussen became the first euro policymaker to say on the record that euro zone finance ministers meeting on Tuesday would be intent only on finding a deal to tide Greece over the next two years. But IMF chief Christine Lagarde told us in an interview that she would push for a permanent solution to Greece’s debts to avoid prolonged uncertainty and further damage to the Greek economy.
Sounds like those two positions could be mutually exclusive. However, it may be that something like a behind-the-scenes pledge from the German government that it will act decisively after next year’s election will keep the IMF on board.

Eurogroup chief Jean-Claude Juncker said at the weekend that intensive work was being done on a compromise with the IMF and progress was being made, after the euro zone sherpas put their heads together on Friday. And even hardline German Finance Minister Wolfgang Schaeuble said a deal had to be struck on Tuesday and would be. Juncker and Lagarde clashed last week over his suggestion that Greece should be given an extra two years, to 2022, to get its debt/GDP ratio down to 120 percent, the level the IMF has decreed is the maximum sustainable. Lagarde looked surprised and firmly rejected the idea.

IMF officials have argued that some writedown for euro zone governments is necessary to make Greece solvent but Germany has repeatedly rejected the idea of taking a loss on holdings of Greek debt, saying it would be illegal. 
Among ideas under consideration to plug the funding gap are further reducing the interest rate and extending the maturity of euro zone loans to Greece, a possible interest payment holiday and bringing forward loan tranches due at the end of the programme, according to euro zone sources.

Asmussen said loans alone did not help as they raised the long-term debt and that a solution had to be found that did not raise Greece’s debt level. It sounds increasingly like the ECB, which could forego profits it has made on its Greek bondholdings worth 12 billion euros or more and allow that to be thrown into the Greek pot (or should I say urn), is prepared for euro zone governments to take a loss on their  bondholdings. But it can’t countenance doing the same itself.

Even hardline Bundesbank chief Jens Weidmann said late last week that a new haircut of Greece’s debt could come as a reward for Athens implementing the reforms it has signed up to. Klaus Regling, the head of the euro zone’s rescue fund, also left more wiggle room than the German government has, saying a haircut could only happen in “exceptional circumstances”.

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 and the game seems to be keeping the show on the road until German elections next September and then taking a more profound decision.

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