The IMF wants eurozone finance ministers to agree to cut Greece's debt by 20pc of GDP now and commit to further debt reduction in the future to get the country's finances back on a sustainable path, a source familiar with EU-IMF talks said last night.
An immediate 20 percentage-point cut, equal to €40bn, could mostly be achieved through lowering interest rates and extending maturities on loans to Greece, the source said.
Finance ministers from the 17 countries sharing the euro, the ECB and the IMF were locked in a third round of talks yesterday to decide how to make Greek debt, expected to rise to 190pc of GDP next year, more sustainable by reducing it to 120pc or below by 2020.
Finance Minister Michael Noonan said they had made "quite a lot of ground" toward an agreement on a Greek financing package.
Possible concessions on our loan rates won't be explored as part of the Greek discussion, he told reporters before a meeting of ministers in Brussels.
"Greece is being dealt with separately," he said. "We have our own sets of negotiations either in place or will proceed next year."
The IMF and the ministers are at odds on how to achieve the goal, with the IMF pushing for a bolder reduction of Greek debt through the forgiveness of some of the official loans to Athens which now make up the bulk of the country's obligations.
Greece's biggest creditor, Germany, opposes any debt forgiveness for Athens.
Without additional debt-cutting measures, Greek debt is likely to fall to only 144pc of GDP in eight years – substantially above the 120pc target. Many policy-makers see even the 120pc as too high for Greece, which is in its fifth year of recession and set to contract again in 2013.
The IMF argues, the source said, that if there is no debt reduction up front, the Greek economy will not grow, nobody will invest and Greeks themselves will not spend, derailing other macro-economic assumptions of its adjustment programme.
But Germany has said debt forgiveness would be illegal and the European Commission has said that a haircut on the principal lent to Athens is a red line for eurozone ministers.
The key to a compromise may be in keeping the principal intact.
One idea discussed by ministers is to keep the principal untouched but lower the interest on the official loans, either extended bilaterally or through the temporary bailout fund EFSF, to below market rates, and to extend maturities.
This could produce a reduction in debt big enough to make Greek debt sustainable, or close to sustainable.
Other available options include the ECB forgoing profits on its Greek bond portfolio, a 10-year moratorium on debt servicing and a buy-back of privately held debt at a deep discount.
The source said the IMF insisted on a package of steps that would slash 20pc of GDP off the debt pile upfront to give the plan credibility and the Greek economy a chance to grow. (Reuters)