The technical teams of Greece’s creditors return to Athens on Tuesday to resume negotiations over the bailout program review. This is what was agreed on Monday’s Eurogroup, after a two-and-a-half-month standstill.
Yet, no one is certain how the negotiations will go, given the differences between Berlin and the International Monetary Fund that have not been resolved yet. The Fund’s demands for generous debt relief to Greece is met with reluctance by many euro zone member states. It is difficult for finance ministers and state leaders to convince their parliaments to accept lending more money to Greece when the debt-ridden country seems unwilling to owe the bailout program obligations.
Germany — Greece’s biggest lender — and the Netherlands have expressed the stance they will keep: No IMF, no bailout program for Greece. The finance ministers of the two countries have said that a new program will be drafted for Greece in case the IMF pulls out, and the program must have parliamentary approval. This would mean several months of delay, as the two countries have general elections in 2017.
So far European institutions estimated that the IMF would be satisfied with a general, vague plan for debt relief measures, provided that Greece agreed to implement tough fiscal measures such as lowering the tax-free threshold and slashing pensions. The IMF insisted that both measures are crucial for the Greek economy to return to normalcy.
However, IMF Director of the European Department, Poul Thomsen put an end to such an optimistic expectation. Thomsen more or less told European institutions to forget the easy solution of high primary surpluses in order for Greece to receive further financial aid in the medium term.
Furthermore, the position of new U.S. Treasury Secretary Steven Mnuchin that the Greek debt issue is Europe’s problem, might mean that the Fund would keep a harder stance on Greece from now on.
The Fund’s insistence might only be a negotiation strategy, trying to squeeze as much Greek debt relief out of European institutions. The IMF sees a big hole in the 2018 budget and never believed that Greece can achieve 3.5 percent primary surpluses in successive years.
Since Germany has elections in September, it is unlikely that it will back down to IMF demands and offer more debt relief to Greece. This could push the bailout program review negotiations until autumn. This would be a disaster for Greece as it has 6.3 billion euros in loan payments due in July.
At the moment it seems that negotiations on Greece have become three-sided. Given that the results of the March elections in the Netherlands, the April elections in France and the September elections in Germany might tip political balances in Europe, the Greek issue is taking the back seat. The political uncertainty in Europe gives the IMF the upper hand and makes it the key player.
Meanwhile, Greece and European institutions can continue the “extend and pretend” game: The Greek government can pretend that it is willing to implement required reforms and blame creditors for not closing the review, and the European institutions can pretend that Greece has made progress and the 3.5 percent primary surpluses for several years is a feasible target.