Yann Quelenn Market Strategist at Swissquote Bank SA
Yann Quelenn Market Strategist at Swissquote Bank SA

IMF calls again for Greece debt relief

First Published: e-Forex Magazine 62 / Currency Clips / October, 2015

In August, the IMF’s Greece mission Chief Delia Velculescu declared that the structure of Greek debt must become sustainable. She suggested that Greece’s European partners to come up with a new strategy including possible debt relief as she views that the current debt load can never be reimbursed.

Despite these logical demands, creditors and Athens are moving forward on the Greek deal with no debt relief in sight.  Three years ago at the second bailout deal, the debt had been fully restructured. Yet, the debt-to-GDP ratio has steadily increased in order to reaching, a massive 170%. Reimbursing only the interests on such a debt also implies being capable to generate a decent amount of growth which is clearly not the case at the moment. Indeed, in order to be able to service its debt, Greece must run a primary surplus (an excess of revenue over spending other than interest) of 0.5% in 2016. However, the interest on its debt is in average above 2.5%. Therefore, below this average, the Greek debt-to-GDP ratio can only go one direction from here and that is straight up. 

IMF calls again for Greece debt relief

It is also worth saying that even Germany is not succeeding in generating the growth that is currently asked to Greece. This year German’s Q2 GDP came in at moderate 1.8% year-on-year. Hence, while the Greek saga is definitely not over, we wonder why the Eurozone future that seems uncertain. Nobel Prize Paul Krugman says that only the major economies in a monetary union benefit from the union, while the others are struggling to be competitive as the currency is too strong for their local economy. The inability for any European countries to debase its own currency represents the major problem. Strict austerity policies are now the normal policies for most countries and Germany is clearly the leader of the Eurozone.

German’s finance minister Wolfgang Schauble still favours a “Grexit” solution. He considers that debt relief and Eurozone membership are “incompatible”. Schauble surely believes that the Grexit will have a minimal impact and that it would be a worthwhile investment as Germany would not have to refinance the Greek debt. Given this dominate German thinking, it is unlikely Greece will get any debt relief. In Greece recent polls indicate that a majority of Greeks would like to stay within the Eurozone since they believe membership is the only rationale economic option. Baring a significant shift in political winds, at the incoming snap elections, Greeks should expected to live under austerity for a very long time. Once again prolonging the economic fantasy called the EMU.”