Bailout Blues
The Neverending Greek Debt Crisis

The unresolved Greek debt crisis is rearing its ugly head once again, as EU officials prepare for a new round of bailout talks in Athens this week. Although talks last Friday briefly rallied the hopes of a spooked bond market, a breakthrough proved elusive, and tensions are flaring up once more.

In a blistering speech over the weekend, Greek Prime Minister Alexis Tsipras pointedly warned Germany and the IMF against “playing with fire” and imposing harsh terms on Greece. And Eurozone leaders, for their part, are doing their own blustering against the IMF. As the WSJ notes, the IMF’s bleak assessment of Greece’s long-term prospects has become a convenient scapegoat for EU leaders frustrated by the debt standoff:

For many Europeans, the IMF is the villain of this crisis.

Eurozone officials accuse it of using overly pessimistic forecasts and being unfairly gloomy about Greece’s capacity for reform. They point to recent data that show Athens on track to deliver an unexpectedly robust primary budget surplus before interest payments in 2016 of at least 2%. As far as the European Commission was concerned, this was evidence Greece could hit its 3.5% primary surplus target in 2018 and maintain it thereafter with no extra fiscal tightening. […]

But the IMF counters that the budget data are provisional and flattered by one-off factors including a very substantial cash inflow in December. It also notes that Greek budget figures are invariably revised down every quarter—and that the average revision is a whopping 2.5%. If the eurozone wants to insist on tough targets, the IMF will insist they are credibly met.

The blame game between Greece, Germany, and the IMF is nothing new to observers of the 2015 debt talks; then as now, European objections to the IMF’s stance threatened to derail the negotiations and precipitate a default. Unfortunately, very little seems to have been learned since then. As Wolfgang Muncher writes in the Financial Timesboth Greece and Germany continue to operate from dishonest assumptions about Greece’s capacity for reform and growth, with only the IMF willing to contradict such comforting delusions:

Failure to tell truth to power lies beneath much of what is going wrong in Europe right now. It may not be the principal cause of the Greek debt crisis, which is now on its umpteenth iteration. But it is more than a mere contributing factor.

You notice it particularly at those moments when others speak the truth, as the staff of the International Monetary Fund have done recently. In its latest survey of the Greek economy it states that “public debt has reached 179 per cent [of gross domestic product] at end-2015, and is unsustainable”.

Europeans are not used to such bluntness. The Germans protested. The European Commission protested. So did the Greeks. They all want to keep up the fairy tale of Greek debt sustainability for a little while longer.

Will the Germans and Greeks finally accept the reality that Greek debt is unsustainable, and pursue a lasting compromise? Unfortunately, the odds are not good. With major elections looming in Germany, France, and the Netherlands, European pressure for a hardline stance against Greece—and against debt relief—will only grow, while Tsipras has a political incentive of his own to stand up to Brussels and Berlin. So far, the Europeans have mastered the art of kicking this can down the road, but the current standoff does not bode well for an enduring solution.

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