IMF’s Lagarde says restructuring should suffice for Greek debt

29 Aug 2015 | Author: | No comments yet »

Greece’s Debt-Reduction Red Herring.

ZURICH (Reuters) – A form of debt restructuring rather than outright forgiveness should enable Greece to handle its “unviable” debt burden, the head of the International Monetary Fund was quoted as telling a Swiss newspaper. Greece’s third bailout program could underpin a swift recovery in the country, provided of course that the hastily scheduled election in September does not derail the program once more. The IMF has yet to make clear if it will participate in the third 86-billion-euro ($96 billion) international bailout that Greece signed up to in early August, having argued in favour of a partial writedown of a debt burden it considers unsustainable in its current form.

Greece’s euro zone creditors, notably Germany, have ruled out a writedown but are willing to consider other forms of restructuring such as a lengthening maturities. The fund has said Greece’s debt level is unsustainable and requires “significant debt relief, well beyond what has been considered so far” by eurozone governments. Asked about those differences, IMF Managing Director Christine Lagarde told Saturday’s edition of Le Temps: “The debate on cancelling the debt has never been open I don’t think it is necessary to open it if things go well… “We are talking about extending maturities, reducing rates, (making) exemptions for a certain period of time.

Mr Regling said talks about debt relief for Greece are possible in autumn, although a cut in Greece’s nominal debt, known as a haircut, isn’t on the agenda. We are not speaking about cancelling debt.” The interview made no mention of whether the IMF will take part in the new bailout, which Lagarde has previously said it will make a decision on by October. Turning to China, Lagarde said she expected the country’s economic growth rate to remain close to previous estimates even if some sort of slowdown was inevitable after its rapid expansion.

China devalued its yuan currency this month after exports tumbled in July, spooking global markets worried that a main driver of growth was running out of steam. “We expect that China will have a growth rate of 6.8 percent. The aid package in form of loans requires Athens to implement tough public spending cuts, tax increases and broader market-oriented economic overhauls. Alexis Tsipras resigned as Greek prime minister last week and the country is expected to enter the official pre-election period later Thursday for the second set of snap elections this year, after opposition parties failed to assemble a coalition government in parliament.

At the beginning of the crisis, especially before the 2012 haircut, foreign and Greek banks benefited from the international bailouts that allowed the Greek government to continue servicing its debt. The ECB’s liquidity assistance has allowed Greeks to continue to invest abroad and import goods, despite the increasingly precarious solvency of Greek banks.

If the debt is cut now—before the creditors have proof that this time Greece is serious about reform—the pressure on Prime Minister Alexis Tsipras to implement reforms will disappear. Other eurozone countries such as Spain, Ireland and Portugal that have adopted reforms and are growing healthily as a result provide ample proof for that.

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