Lagarde, Merkel Set for Debt Relief Showdown


The third bailout for Greece that was agreed upon in the eurozone and euro summit agreements last week in Brussels— and approved by the Greek Parliament, call for €86 billion in new loans for Greece and assumes some of the financing from the International Monetary Fund.

The Washington DC-based IMF, however, allows for continued loans— only if the nation’s debt is sustainable and has made clear it won’t ask its 187 other member nations to approve a deal until euro-area states significantly ease terms on existing loans.

This means there will be a showdown— eventually— between IMF head Christine Lagarde and German chancellor Angela Merkel, who has been a tough critic of debt relief, and German finance minister Wolfgang Schäuble who insists that debt write-downs are against European policy and laws.

“There will come a time in the next three months that there will be a tense moment between the IMF and Germany,” said Stephen Jen in a Bloomberg interview, a former IMF economist who is now managing partner at SLJ Macro Partners LLP in London. “They are basically telling the Germans there has to be a debt realignment before they would participate.”



The IMF’s spokesman Gerry Rice said Thursday the fund’s participation in the new bailout is contingent on a balanced approach that includes both Greek reforms and a commitment to the required financing. “We’ve said pretty clearly that debt relief is required,” Rice told reporters in a regular briefing in Washington.

Greece needs debt relief “far beyond” what European creditors have been willing to consider, either by extending repayment for decades or effecting deep writedowns on the value of Greek debt, the IMF said in a staff analysis distributed to the fund’s board on July 10.


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