The situation in February 2017 feels indeed like Groundhog Day. The same old discussion on debt sustainability (or the lack thereof as the IMF has pointed out correctly). And increasing conflict between
the creditors on whether and how much debt relief to grant Greece and at what point. The positions of IMF, on the one side, and the Eurozone countries, on the other hand, are not surprising. IMF staff takes a purely technocratic view assessing the debt
repayment capacity of the Greek government, but also taking into account political economy constraints, such of extremely low probability that a democratically elected government will be able to maintain a primary surplus of 3.5% over longer time periods.
The latter has been clearly shown by Barry Eichengreen and Ugo Panizza in this Economic Policy paper.
And even if there might not be an immediate cash flow problem as often pointed out by Eurozone officials, simply delaying debt repayments amounts to kicking the can down the road, but not to solving any debt overhang. At the same time, the certainty
of further stand-offs between Greece and its creditors down the road undermines economic recovery (which is ultimately needed for debt repayment). A vicious cycle, indeed! The European creditors’ view are backed by one economic
and one (more important) political argument. The economic argument is that of necessary reforms in Greece only being implemented if there is continuous pressure on the Greek government, pressure that would go away in the case of a big debt relief at
this stage. However, the evidence over the past seven years should have clearly shown that reforms imposed from the outside simply do not work, no matter what the color of the Greek government and how long the list of reforms included in the Troika programs.
The political argument is that of the upcoming elections in the Netherlands, France and Germany – governments simply do not want to recognize the losses they have already incurred.