Greece’s international lenders – the International Monetary Fund (IMF), the European Union (EU) and the European Central Bank (ECB) – failed to agree on a debt relief package, for the second week in a row. They have decided to give Greece two more years to hit a deficit target. The question now is: how do they cover the €30bn cost of this move?
So Greece, despite having met the latest conditions for more help, is still awaiting a total of €44bn of overdue aid and credit allotted to it until the end of 2012. Meanwhile, France’s vulnerability to the debt crisis came into focus. Credit-ratings agency Moody’s stripped the nation of its triple-A credit rating. Rival Standard & Poor’s did the same in January this year.
What the commentators said
The key issue on Greece, explained Fxpro.com, is a division between the IMF and other creditors. The IMF “does not like, and is not allowed to, lend to a nation unless its debt is on a sustainable footing”. It thinks the public sector must take a haircut if the debt pile is to come under control.
This is virtually indisputable, but governments have promised taxpayers they won’t lose money on bail-outs, and Germany in particular is loath to signal to other indebted countries that their debts could be written off, thus reducing the incentive to reform and cut costs.
So EU leaders have tried “every which way” to find other methods for relieving Greece’s burden. Extending repayment deadlines, charging lower interest rates, and forcing the ECB to forego any profits on its holdings of Greek debt have all been discussed.
One thing we don’t have to worry about, according to Wolfgang Munchau in the Financial Times, is how the EU will raise the cash that such measures will cost them. “In my many years in Brussels I have learnt never to underestimate the ability of European technocrats to find money.” They will introduce a “complicated, transparency-obfuscating special purpose vehicle if they have to”.
But this won’t change the fact that the IMF is right, as economist James Mirrlees pointed out on Bloomberg. Europe won’t solve the problem by “fiddling around” with little extra bits of bail-out and allowing [Greece] to go a bit slower.
Meanwhile, the worsening recession will make core states even more reluctant to bail out the south, as Capital Economics pointed out. Get set for plenty more heated but inconclusive meetings.