The IMF “hardcore” Proposal for Debt Relief in Greece goes far beyond what the EU creditors are willing to do

Interest rate on eurozone loans would be fixed for 30 to 40 years, say people familiar with the proposal—a demand that goes far beyond what Greece’s European creditors have said they are willing to do.

BERLIN—The International Monetary Fund is pressing the eurozone to let Greece skip paying interest or principal on bailout loans until 2040, say officials familiar with the talks.

The IMF wants the loans to Greece to fall due gradually in the following decades, and as late as 2080, according to the IMF’s proposal—a demand that goes far beyond what Greece’s European creditors, particularly Germany, have said they are willing to do to help Greece regain its financial health.

Greece’s interest rate on eurozone loans would be fixed for 30 to 40 years at its current average level of 1.5%, with all interest payments postponed until loans start falling due, under the IMF proposal.

The IMF’s proposal, presented to eurozone governments late last week—and described by one European official as “hardcore, really”—would keep Greece’s annual debt-service needs below 15% of its gross domestic product, under the IMF’s relatively pessimistic forecast for Greece’s long-term economic trajectory.

Eurozone governments, led by Germany, are reluctant to make such major concessions on their loans to Greece, which currently total just over €200 billion ($226 billion) with around another €60 billion to come under the latest Greek bailout plan.

But Germany, the eurozone’s dominant economic power, also wants the IMF to rejoin the Greek bailout as a lender. The IMF hasn’t yet signed up to the Greek program agreed last summer.

German Chancellor Angela Merkel has long viewed the IMF as essential to the credibility of the Greek bailout. Her government promised Germany’s parliament, the Bundestag, last year that the IMF would join the new bailout program before Europe disburses further money to Athens.

The chancellor and many of her lawmakers believe that, without the IMF, the eurozone wouldn’t be able to enforce rigorous fiscal and economic overhauls in Greece in return for loans. The European Commission, which partners the IMF in overseeing the bailout, is seen in Berlin as too soft on Greece. Finland and the Netherlands also want the IMF on board.

The U.S. government is pressing both the IMF and the eurozone to find a compromise on debt relief that allows for full IMF involvement in the bailout. The U.S., conscious of the European Union’s multiple current challenges and political fragility, wants to avoid a repeat of 2015’s Greek crisis, when the country came close to bankruptcy and exit from the euro. Some U.S. officials fear a deal could fail because of inflexible positions on all sides.

The German Chancellery is pushing hard for a deal with the IMF, say people familiar with the talks. But the IMF has said it cannot rejoin the bailout unless the eurozone deeply restructures its Greek loans. Greece’s debt burden is “highly unsustainable,” IMF head Christine Lagarde said recently.

A major Greek-loan restructuring would require a contentious debate and vote in the Bundestag, with the potential for a rebellion among conservative lawmakers and a boost to the rising right-wing populist party AfD.

German officials thus want to make only limited adjustments to Greece’s loan terms now, and postpone major changes that would need a Bundestag vote until 2018—after Germany’s national elections in 2017.

German and other eurozone officials are in negotiations with the IMF aimed at finding a formula that would assure the IMF that Greece’s debt will be restructured, while letting Germany delay final decisions until 2018.

The IMF’s push to lock in low interest rates for Greece for decades to come is hard for the eurozone to digest. The bloc’s bailout vehicles, such as the European Stability Mechanism, would then need subsidies from national budgets to cover a part of their own funding costs. IMF staff “like solutions that imply budgetary transfers,” said a European official.

If the IMF and Germany can’t bridge their differences, the eurozone will to have to press ahead with its next batch of loans for Greece without the Washington-based fund. Many European officials say talks with the IMF could continue later.

But a debt deal would become politically more difficult as Germany’s election year of 2017 approaches, some participants in the talks point out. Failure to bring the IMF back on board now could therefore mean the end of its role in Greece, except as a technical adviser. That would be a major embarrassment for Ms. Merkel.

Many European officials are hoping for a deal by the time eurozone finance ministers meet on May 24, allowing a disbursement soon afterward. But some negotiators believe more time may be needed.

The IMF is also at odds with eurozone authorities and Greece’s government over how to ensure Athens hits its budget targets. But Greece is expected to pass the bulk of the fiscal measures creditors want from it by next week. The crucial fight is now among the creditors. “Greece is basically out of the picture,” says another European official. “This is a dialogue between the IMF and the countries that really want the IMF.”

A solution is needed by June, when Greece needs fresh bailout funds to pay expenses including pensions and wages that its depleted cash reserves can no longer cover, according to officials involved in the talks.

Greece is entering the seventh year of its troubled bailout still struggling to begin a recovery. The country has largely closed the gaping budget deficit that triggered its debt crisis. But the IMF-European bailout, including more than 30% of GDP in cumulative austerity measures so far, contributed to a 25% decline in the country’s economic output since before the debt crisis.

—Gabriele Steinhauser in Brussels and Ian Talley in Washington contributed to this article.

Source: The Wall Street Journal