Interests clash in Greece debt crisis

BRUSSELS – To many Greeks, the debt the country has amassed is the evil fruit of austerity policies, imposed from the outside, that asphyxiated its economy and trampled on its sovereignty.

To the International Monetary Fund, the debt of more than 310 billion euros, or almost $339 billion, is more of a mathematical problem. After years in which it was a stern advocate of tough austerity policies, it now says that there is no way that Greece can reasonably pay its debts and that a substantial amount of it needs to be forgiven.

Then there is Germany, Greece’s largest single creditor, which treats Greece’s debts as a sacrosanct commitment that must be paid as a matter of law and of principle.

As Greece and its creditors begin working on the details of the latest bailout package – the third for Athens in the past five years – the issue of debt has become something of a Rorschach test. Nearly everyone agrees that its debt is unsustainably high, but figuring out how to grapple with it has unleashed a volatile mix of politics, economics, history and even morality.

The economic argument in favor of debt relief is that Greece’s depression-scarred economy cannot be expected to carry the weight of debts that now amount to around 175 percent of gross domestic product. This is already far above what the IMF set as a “sustainable” target of 110 percent, and could increase to 200 percent and more in coming years if the economy withers further.

Mathematics, however, has never had much bearing on the debate. Athens and Berlin instead often focus on what each sees as the moral crux of the issue, taking opposing and often emotional stands that only make a deal harder to achieve.

“I have been involved in debt negotiations for 40 years and never found it useful to moralize about the problem,” said Charles H. Dallara, a former managing director of the Institute of International Finance, a group representing financial institutions that played a central role in negotiations allowing Greece to eliminate more than half its debt to private creditors in 2012.

“It makes no sense to demonize the debtor or the creditor,” he said. “But there has been a constant tendency with Greece to treat the debtor as a sinner. This has been a big part of the problem. It created a lot of resentment in the populations of creditor countries” that do not want to see their taxes going to an unworthy cause, and has also “catalyzed deep resentment in Greece.”

The IMF’s hardheaded, numbers-based approach often infuriated Greece’s left-wing government when it was applied to budget deficits, tax revenues and other demands that creditors imposed.

The monetary fund recommended either a “very dramatic extension” of payment deadlines by up to 30 years or “deep upfront haircuts,” banker jargon for write-offs.

“The report is a great vindication for the Greek government,” Greek prime minister Alexis Tsipras said in a statement. “It confirms the obvious – that the Greek debt is unsustainable.”

Mr. Tsipras has for years been demanding a European Debt Conference modeled on the London Debt Agreement of 1953 that wrote off about half the pre- and postwar debt taken on by West Germany.