By Jeremy Gaunt
Pretty much everyone agrees that Greece needs debt relief; what they don’t agree on is what debt relief means.
Easing Greece’s fiscal path forward is likely to be the next great struggle in the country’s agonising, seven-year, three-package bankruptcy saga now that a bailout pact has opened the door a crack to discussions on relief.
Only this time it will not just pit Greece against its lenders, but lender against lender as well.
Start with the numbers: At the last count, the Greek government owed 314 billion euros ($343 billion) despite writing off about 100 billion euros owed to private bondholders in 2012.
That’s more than the gross domestic product of South Africa.
It’s also equivalent to around 179 percent of GDP, a ratio which despite improvements in Greece’s economic performance goes up every time lenders make a bailout payment to Athens.
This is why debt relief is on the agenda — with Greece perhaps quixotically pushing for something as early as May 22, when the Eurogroup of euro zone finance ministers meets to sign off on Tuesday’s staff-level pact on support for Athens.
The battle will be fought on a number of fronts.
Firstly, there is the issue of whether the International Monetary Fund will participate financially in the current, third bailout.
The IMF says Greece’s debt is unsustainable — with or without the reform measures taken — and it doesn’t want to keep throwing money at the problem while that is so. Indeed, it is not allowed to by its charter.
“For the IMF to be entering into a programme with Greece would require that the programme can walk on two legs. One leg is the leg of reforms and the other leg is that of debt sustainability,” IMF Managing Director Christine Lagarde said last month.
The European Union lenders — the European Commission, European Central Bank and European Stability Mechanism — want the IMF involved, primarily because it brings in an outside enforcer.
But the Europeans themselves have so far refused to say what they plan to do, preferring a general pledge to provide debt relief once certain reform criteria are achieved.
Germany, for one, does not want to show this year’s voters it is doing Greece a favour using German taxpayers’ money.
That is not enough for the IMF.
Then there is the question of what kind of debt relief to offer Greece. There is something of an edifice in place here, but so far it is a wall without cement.
There is no longer any talk of debt “forgiveness” – simply letting Greece off paying back its debt. The euro zone says there is no provision for that under its rules.
But there is less objection to stretching out payments, cutting interest on the EU debt and making repayments flexible enough that they do not amount to more than 15 percent of Greece’s GDP annually.
For its part, the IMF cannot legally change its repayment structure, which in turn slightly undermines its demands of the EU.
How far to stretch out payments, where to cut interest rates to, and even what part of the debt is included are all issues to be argued over.
One more opportunity for a clash is over just how much of a primary budget surplus — the budget balance excluding debt repayments — Athens has to run for its debt to be sustainable.
The IMF says Greece can hit 2.2 percent in 2018 and aim at 3.5 percent annually in 2019-2021. After that, though, it says it should only be 1.5 percent.
Euro zone lenders, however, want Greece to sustain a 3.5 percent primary surplus target over a slightly longer period to be able to pay the annual interest rates for its debt. After that, it is publicly undecided.
Few other European Union countries run surpluses of the size that Greece is being told to reach and sustain.
But then, none of them have a debt mountain relative to GDP the size of the South African economy.