IMF divisions propel Greek short-term debt yields to 9%

Another worrying dose of news for Greece.

The International Monetary Fund has revealed divisions within its executive board over the state of Greece’s bailout programme, throwing further doubt on its participation and knocking short-term bonds this morning.

Meeting to discuss its involvement in Greece’s three-year rescue, IMF said late on Monday its senior officials had diverging views on the state of the Greek economy and the need for further economic reforms to ensure the country’s debt becomes sustainable.

Greek bonds, which have sold off steadily over the last week, have dropped further this morning, with the yield on the country’s two-year debt up more than 20 basis points to above 9 per cent for the first time since June last year. (Yields rise when a bond’s price falls.)

A key battle between the IMF and EU creditors is over a 3.5 per cent primary budget surplus Athens will need to hit after the end of its bailout in 2018 – with the Fund arguing the target is over-ambitious and cannot be met without further fiscal retrenchment.

But in its latest statement, the IMF said “most directors agreed that Greece does not require further fiscal consolidation at this time” while “some directors favored a surplus of 3.5 percent of GDP by 2018″. (Our emphasis.)

Notably, the Fund’s latest forecasts predict Greece will only hit a 1 per cent primary budget surplus (which excludes debt repayments) this year, despite the Syriza government’s impressive efforts at tax collection and reduced government expenditure.

Last week, a leaked IMF assessment of the Greek economy warned of its “explosive” debt dynamics, urging its EU partners to grant the country substantial debt relief. The EU, led by Germany, has fiercely resisted any restructurings that would see its taxpayers lose money.

Commenting on the its latest assessment, Monday’s IMF statement said “most directors considered that, despite Greece’s enormous sacrifices and European partners’ generous support, further relief may well be required to restore debt sustainability”.

Evidence of discord is rare among the IMF’s executive board, which usually offers unanimous statements after holding closed-door deliberations (more from the FT’s Shawn Donnan here).

The stance will raise fresh questions about the IMF’s financial participation in Greece’s €86bn rescue, amid warnings from Germany that any decision to pull out would end the current creditor agreement after months of tortuous wrangling that bought Greece to the brink of default in the summer of 2015.

A fresh stand-off between Athens, the EU, and the IMF could escalate as Europe faces a packed electoral agenda, with major votes being held in Austria, the Netherlands, France and Germany this year.

Greece is also due to pay nearly €7bn to its creditors in July – obligations it will not be able to meet without a fresh injection of bailout cash.

The IMF acknowledged the “high cost to society” imposed by swinging cuts to government spending, including slashing pensions and hiking consumption taxes such as VAT.

After six years of bailouts, Greece is expected to grow by 2.7 per cent this year according to the IMF’s latest forecasts, accelerating sharply from just 0.4 in 2016.

First chart via Bloomberg