Greek debt relief is sticking point for any further bailout

A surprise intervention by Donald Tusk yesterday has once again put the question of debt relief back at the centre of the Greek debate.

On the back of a phone conversation with Greek prime minister Alexis Tsipras, the head of the European Council said that a "realistic proposal from Athens" needed to be matched by a "realistic proposal from creditors on debt sustainability" to create a "win-win situation".

Tusk is by far the most senior EU figure to openly put the toxic question of debt sustainability on the table. It follows renewed calls from the International Monetary Fund on Wednesday night for Greek debt restructuring. Addressing the Brookings' Institute, IMF managing director Christine Lagarde said that debt restructuring was needed to deal with Greece's problem of debt sustainability. "That analysis has not changed. It may well be that numbers may have to be revisited but our analysis has not changed." Her comments were echoed by US treasury secretary Jack Lew the same evening who, in the strongest comments yet from Washington, said he expected the two sides in the Greek impasse will come together so that "Greece will take the actions that it needs to take, so that Europe will restructure the debt in a way that is more sustainable".

Poorer nations

The IMF’s position, however, is not clear-cut, despite it being a constant advocate of debt write-offs since the early days of the Greek bailout when it favoured more private sector involvement. Significantly, the IMF’s chief economist Olivier Blanchard ruled out a debt cut to Greece’s IMF loans yesterday, noting that much poorer IMF-programme countries had not been given such benefit.

The institution’s call for debt relief has caveats. Lagarde has consistently said that while the IMF needs to see some commitment to address Greece’s debt sustainability as part of any third package, Greece must also engage in reforms.

This was evident in her Wednesday night speech which cast reform and debt restructuring as two “legs” of the same deal.

It is becoming clear Greece will demand some formal statement on debt restructuring as part of its next bailout agreement – the issue gets a cursory mention in its ESM application letter submitted on Wednesday.

Comments by Michael Noonan and others that they would be open to debt reprofiling suggests it is already part of the conversation. But this is not to underestimate the strength of resistance to anything that could be construed as a cut to the nominal value of Greek debt from countries such as Germany, Finland and a number of east European states.

Within hours of Tusk's statement yesterday, German chancellor Angela Merkel moved to clarify that a debt haircut was out of the question, repeating comments made in Brussels following Tuesday evening's summit. "I have said that a classic haircut is out of the question for me and that hasn't changed between today and yesterday," she said during a visit to Bosnia.

Sustainability issues

“In 2012 we dealt with the issue of debt sustainability. We stretched out the maturities, we pushed back the repayment requirement for EFSF loans out to 2020, so we are not dealing with debt sustainability for the first time.”

Her comments were echoed by German finance minister Wolfgang Schäuble yesterday in Frankfurt, who said that even the room for debt reprofiling was minimal.

Should a deal be struck this weekend, expect debt relief to be a key talking point when a third bailout package for Greece goes to various national parliaments for approval.