The International Monetary Fund and Europe remain deadlocked over how to tackle Greece's debt crisis, with Europe willing to consider only lower interest rates and longer debt repayments, while the IMF is pushing for a debt restructuring, according to senior European officials.
"We are still apart. Time is tight and there is a need for a common line," a senior European official with direct involvement in the matter said.
The official said that a number of euro-zone countries, led by Germany, see the Greek problem "as one of adjustment and structural reforms over time; the IMF sees it more as a debt issue, which must be addressed at once."
While the IMF is prepared to examine various ways that could eventually lead to debt reduction, including yet another bailout package by the euro zone that will help Athens return to growth and cut its debt level, its preferred method is a reduction in the amount of debt outstanding—what is referred to as a "haircut."
But a haircut is anathema in the euro zone because of political repercussions.
Officials said that the IMF has made it clear to the Europeans that it isn't prepared to extend more money to Athens without a move that leads to a cut in the debt level first. Apart from the limits imposed on it by its statutes, the IMF is unwilling to risk its credibility before possibly being asked to take part in a much larger bailout of Spain.
Greece's debt sustainability is among the top matters discussed at the IMF's annual meetings under way in Tokyo. The second bailout agreement in March defined debt sustainability as 120% of gross domestic product by 2020. But the Fund's fiscal monitor said Tuesday that ratio would climb to 170.7% of GDP this year, and a whopping 181.8% of GDP in 2013, because of the recession being worse than expected. That suggests the 120% target is out of reach. Officials said the IMF believes that by 2020, the debt-to-GDP ratio will be close to 150%.
"This means that the IMF won't sign off the next loan payment until the other creditors take the necessary action to cut the debt level," a second European official said. "While they are debating on what is the best course of action, Greece will run out of money some time in November."
Greece, which has already received hundreds of billions of euros in two bailout packages from the euro zone and the IMF since 2010, remains in a dire condition. The imposed austerity and cutbacks have pushed the economy in a contractionary spiral for five straight years. The country is counting on a next loan payment of 31 billion euros ($40 billion) by the end of November to stave off default. Representatives of the "troika" of lenders of the euro zone, IMF and European Central Bank are currently in Athens negotiating a new series of austerity measures in return for that money.
The IMF, which as a senior creditor can't accept a write-down on the money it has lent to Greece, would be satisfied with a debt reduction of about €50 billion ($65 billion), according to officials involved in the matter. But that is politically prohibitive in countries such as Germany where public opinion is staunchly against any more help to Greece. Any such move could damage the re-election hopes of Chancellor Angela Merkel at a national poll next year. Ms. Merkel visited Athens on Tuesday for the first time since the crisis began but, despite offering moral support and sympathy, gave no public indication of being willing to change the terms of the existing program.
Some €50 billion of Greek debt is currently held by the European Central Bank and some of the euro zone's 17 national central banks. Restructuring these claims could save euro-zone governments the embarrassment of explaining to their parliaments why they had to write down the loans that they made to Greece in 2010 and 2011.
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