An agreement among Greece’s creditors on how to reduce its large debt pile should be “rooted in reality and not in wishful thinking,” IMF Managing Director Christine Lagarde said as she heads into a tense meeting with European leaders.
Lagarde said she would push for a permanent solution to Greece’s debts to avoid prolonged uncertainty and further damage to the Greek economy.
To Lagarde, that means countries in the eurozone should send a strong signal they remain committed to Greece by agreeing to reduce the debt Athens owes them.
“I am always trying to be constructive, but I am driven by two objectives,” she said in an interview. “To build and approve a program for Greece that is solid, that is convincing today, that will be sustainable tomorrow, that is rooted in reality and not in wishful thinking.”
“The second objective is to maintain the integrity, credibility and quality of advice that we are giving, not for the IMF itself, which obviously is a concern of mine, but to lend that to the Europeans because that is what they are interested in,” she said late on Saturday.
In an unusually public airing of disagreement that flared during a news conference in Brussels on Tuesday, Luxembourg Prime Minister Jean-Claude Juncker, who chairs the Eurogroup of finance ministers, said the target of reducing Greece’s debt to 120 percent of GDP by 2020 should be moved by two years to 2022.
Appearing surprised by Juncker’s statement, Lagarde disagreed, saying the target of 2020 should remain.
The stand-off threatens to further delay the next 31.5 billion euro (US$40.1 billion) tranche of Greece’s bailout, pushing the country close to bankruptcy. Greece’s successive bailouts have already suffered setbacks from elections and resistance to reforms.
“They might resent me ... but that is in their interest,” Lagarde said of the European creditors. “The two objectives are critical for me, both of them.”
Taking a hit on Greek debt is politically difficult for politicians like German Chancellor Angela Merkel, facing an election next year.
Greece is heading into its sixth year of depression that has wiped a fifth off its economic output and sent unemployment to a record high — one in four Greeks are out of work.
Bickering among its creditors could cause more economic damage for Greece if markets do not believe that Athens has the support of Europe and is concerned about the IMF’s commitment to the bailout.
Lagarde has previously said the IMF does not walk away from countries, but without a European deal on Greece’s debt and financing she cannot take the matter to the IMF board of member countries for approval.
“[Markets] are not going to be convinced today that the solution holds in the medium term,” she said of Greece’s debt problems. “And that is what we need to focus on.”
One option is for eurozone countries to agree on cutting the interest rate on outstanding Greek debt — some have suggested reducing it to zero. Another option is combining interest rate reductions with prolonging the repayment period, a move that could calm markets since the bulk of the debt matures in 2021 and 2022.
“The sense I have ... is that the Europeans have taken the view that the zone has to stay a zone of 17 member states,” Lagarde said of Europe’s political commitment to Athens.
Bundesbank President Jens Weidmann, who is also a member of the European Central Bank’s governing council, said on Friday that Greece’s debt levels were unsustainable, but that it would have to earn a writedown by getting its budget into shape.