The International Monetary Fund has electrified the referendum debate in Greece after it conceded that the crisis-ridden country needs €50bn (£35bn or $55bn) of extra funds over the next three years and large-scale debt relief to create “a breathing space” and stabilize the economy.
With three days to go before a knife-edge referendum, the IMF revealed a deep split with Europe as it warned that Greece’s debts were “unsustainable”.
Fund officials said they would not be prepared to put a proposal for a third Greek bailout package to the Washington-based organization’s board unless it included both a commitment to economic reform and debt relief.
According to the IMF, Greece should have a 20-year grace period before making any debt repayments and that final payments should not take place until 2055.
The IMF’s analysis will be seized upon by Alexis Tsipras, the Greek prime minister, who has been insisting that he will only agree to tough new austerity measures if Greece is granted debt relief.
In a strong message to European leaders, the IMF said they would need to find extra money for Greece following the marked deterioration in the state of the economy since Tsipras’s Syriza coalition took over at the start of the year.
“Very significant changes in policies and in the outlook since early this year have resulted in a substantial increase in financing needs. Altogether, under the package proposed by the institutions to the Greek authorities, these needs are projected to reach about €50bn from October 2015 to the end of 2018, requiring new European money of at least €36bn over the three-year period.
The IMF said that even if Greece is offered generous terms, it is still likely to require a reduction in debt of around 30% of national income to bring it down to 117% of GDP, the uppermost limit of what the Fund considered sustainable at the time of the second Greek bailout in the autumn of 2012.
“Even with concessional financing through 2018, debt would remain very high for decades and highly vulnerable to shocks. Assuming official (concessional) financing through end–2018, the debt-to-GDP ratio is projected at about 150% in 2020, and close to 140% in 2022.
“Using the thresholds agreed in November 2012, a haircut that yields a reduction in debt of over 30% of GDP would be required to meet the November 2012 debt targets.”
The IMF added that if growth was lower than expected or if the Greek government failed to meet targets for running a surplus on its budget excluding interest payments, there would be “significant increases in debt and gross financing needs”.
The IMF said that is was releasing it preliminary draft debt sustainability analysis as a result of the leaks of documents reported in the Guardian earlier this week.
Significantly, it said its assessment had “not been agreed with the other parties in the policy discussions” – an admission that the Fund is at odds with its troika partners – the European commission and the European Central Bank – over the need for debt relief.
The Fund has traditionally viewed debt relief as an integral part of any package to improve the economic prospects of a country seeking help, but it has met resistance from European governments fearful that the cost would have to be met by their own taxpayers.
In response to criticism that the IMF has failed to tackle intransigence in European capitals against a further debt write-off, a senior IMF official said: “We are asking the Greeks to do very difficult things. We are also asking the Europeans to do something very difficult.
“The extension of maturities [by the EU] on Greek debt would be a dramatic move.”
He said that while “it was a fact that Europe has already provided considerable debt relief in GDP terms” to Greece, the current dire situation meant they needed to do more.
The official said he had refused to put forward plans for a further bailout of Greece to the IMF board without a comprehensive deal that included debt relief.
“We cannot go to our board with this report unless we have a credible programme that is sustainable and with a policy from the EU on debt relief. We want a comprehensive solution and cannot go to the IMF board without it.”