Greece, Germany, IMF: Someone Has To Blink -- The Short Answer

It's déjà vu all over again! What's the latest fight about?

The International Monetary Fund has lost patience with the strained math of the Greek bailout plan. It is refusing to lend Greece any more money, unless either the country enacts extra austerity to guarantee a high budget surplus, or eurozone countries led by Germany write down a lot of what Greece owes them.

Germany’s irascible finance minister, Wolfgang Schäuble, is taking a hard line against any debt relief. So the IMF, with German encouragement, is taking a hard line on Greek budget cuts.

The IMF is convinced that previously negotiated austerity measures will leave Greece short of its agreed target—a budget surplus before interest of 3.5% of GDP in 2018—by two percentage points.

So the IMF wants Greece to guarantee now that it will automatically impose extra cuts worth 2% of GDP if the budget is off target. The axe should fall on pensions, public-sector pay, and tax exemptions, the IMF thinks, because all other Greek spending has already been cut toodeeply, and tax rates are already too high. Greece’s finance minister, Euclid Tsakalotos, is adamant that legislating a list of extra budget cuts that are conditional on future budget data is politically and legally impossible. His compromise proposals so far are not specific or automatic enough for the IMF. Mr. Tsakalotos has repeatedly warned lenders that he would sooner resign than give in, according to people familiar with the negotiations.

Can anyone broker a deal?

European Union officials are trying. The EU’s executive arm, the European Commission, is pressing the IMF to back down. And Dutch finance chief Jeroen Dijsselbloem has called a meeting of the “Eurogroup” ofeurozone finance ministers, which he chairs, for May 9.

That meeting could debate debt relief for Greece, an incentive for Athens. But debt talks first need clarity on Greece’s budget. Thus, the May 9 date sets a deadline for a Greek-IMF compromise.

European officials are hoping— in typically inelegant EU-speak—that a “commitment technology,” or formula for the 2% “contingency measures”, can be both tough enough for the IMF and gentle enough for Athens.

But they don’t know how.

“The Europeans are trying to will an agreement into existence,” says Nick Malkoutzis, founder of Greece-analysis website MacroPolis.

What are the possible solutions?

One of the three main actors has to cave in.

The IMF could accept Greece’s offer to trim all public spending, in case its budget is off target, without enumerating specific cuts to politically sensitive areas such as pensions.

But that could be a compromise too far for the IMF, which thinks it has already compromised too much with both Greece and Germany.

The IMF isn’t under much pressure to strike a deal; many fund officials would be relieved if they don’t have to take part in the Greek bailout any more. It hasn’t been a happy experience.

Germany could back Greece’s compromise offer, and lose IMF participation. But Chancellor Angela Merkel has spent six years telling her parliament and public that the Greek bailout plan is only credible if the IMF is on board. Berlin doesn’t trust the Brussels-based commission to police the bailout strictly.

Ms. Merkel wants to avoid Grexit, because of its unpredictable economic and political fallout. Mr. Schäuble wouldn’t mind so much: He has long thought Greek politicians aren’t up to the rigors of euro membership.

Greece could give in to the IMF’s demands, with face-saving concessions for Mr. Tsakalotos and his boss, Prime Minister Alexis Tsipras.

Greece is under time pressure to do a deal. With its bailout aid frozen, the country is burning through its low cash reserves. The government can pay pensions and wages in May but not June, European officials say.

So the likely outcome is that Greece blinks?

The unpredictable factor is Syriza and its leader, Mr. Tsipras.

Many politicians and other close observers in Athens say the IMF’s terms would not survive a vote in parliament, where the Syriza-led coalition has a majority of only three seats.

Rather than lose his lawmakers’ support in parliament, Mr. Tsipras might choose snap elections, which opinion polls suggest would put Syriza in opposition. Then the conservative New Democracy party would have to deal with the IMF, whose demands it too rejects.

Mr. Tsakalotos is telling the IMF that no elected government could dowhat it asks, according to people familiar with the talks. We’ll soonsee if he’s right.