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Why Greece is top of Germany's to-do list - again

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Why Greece is top of Germany's to-do list - again
Unemployed Greek workers with symbolically chained hands march on May 1st in Athens. Photo: DPA
11:58 CEST+02:00
German leaders spent much of the first half of 2015 wrangling Europe into a deal that would – they hoped – allow Greece to pay off its debts by restructuring its economy and making deep cuts to public spending.

But almost a year later the stricken Mediterranean country is once again top of the agenda at meetings of the Eurogroup (finance ministers of countries that use the Euro single currency) – with the latest set for Tuesday afternoon.

What's the story so far?

A major aim in 2015 was to prevent those who had lent money to Athens from having to accept a 'haircut': financial jargon for a cut in the amount they could expect to be repaid.

Germany, as one of the biggest lender countries and a dominant figure in the Eurozone single currency area, was at the heart of the negotiations. Public and political opinion in the Federal Republic were dead set against giving the Greeks any leeway.

MPs in the Bundestag (German parliament) did end up voting through a bailout package last July – but only because Finance Minister Wolfgang Schäuble promised there would be no haircut and that the International Monetary Fund (IMF) was on board with the plan.

Finance Minister Wolfgang Schäuble has been tough on Greece throughout its financial woes. Photo: DPA

But in a paper published on Monday the Washington-based IMF has changed its tune, saying that it now disagrees with Schäuble and that Greece should get relief from its debts.

Unless something changes soon, the IMF economists argue, Greece will owe 175 percent of its annual GDP to creditors by 2020 and 260 percent by 2060 – making its debt completely unsustainable.

What's been going on in Greece?

Greece's left-wing prime minister, Alexis Tsipras, has spent the best part of a year implementing the reforms demanded by Greece's creditors as a condition for lending more cash.

Just this week MPs agreed to raise taxes on petrol, tobacco and telecoms services in a bid to raise more money.

That's on top of severe cuts to the country's pensions and social systems that have already been passed, as well as privatizations of many government-owned businesses and assets.

Lawmakers in Athens also recently agreed a package of yet deeper cuts that will only come into effect if the country does not meet its savings targets.

Greek Prime Minister Alexis Tsipras has become a veteran of knife-edge votes in the Athens parliament. Photo: DPA

All of this has been going on against a background of fierce protests against the cuts - and many votes in parliament have passed with only single-digit majorities as Tsipras has faced revolts from his own MPs.

And the cuts have yet to have the intended effect of allowing the economy to grow.

In fact, output has shrunk, meaning that the debt burden is ever more difficult for Athens to bear.

What does Greece need now?

Greece needs €3.67 billion by July for debt repayments to the European Central Bank (ECB) and the IMF.

According to Bloomberg, on the table on Tuesday is €11 billion, the latest tranche of the €86 billion bailout agreed last year.

But it can only be paid out if Eurogroup finance ministers agree at their meeting that Greece has lived up to its reform commitments.

"European leaders get the message that Greece is sticking to its promises," Tsipras said on Sunday. "Now it's their turn."

What's the hold-up?

Following the IMF's dramatic entry into the debate over debt relief, Schäuble has held firm to his insistence that there should be no cuts to Greek debt before 2018.

Schäuble claims that he wants to make sure the bailout programme has been fully implemented before considering debt relief.

But a 2018 date would also come conveniently after parliamentary elections in Germany slated for autumn 2017.

Other Eurogroup members including chairman Jeroen Dijsselbloem say that debt relief has to be agreed immediately to keep Greece afloat – and the IMF has given them ammunition with its latest analysis.

IMF head Christine Lagarde (l) and Eurogroup chief Jeroen Dijsselbloem (r) are likely to go head-to-head with Schäuble. Photo: DPA

The Washington institution has called for Greece to be spared debt and interest payments until 2040 and have its interest rate frozen at 1.5 percent – but also for further reforms of the pension system and other parts of the Athens budget.

So Tuesday afternoon's meeting is set to be a showdown mainly between Germany and the IMF.

With IMF head Christine Lagarde unable to attend, it may be that no agreement can be reached in advance of a G7 meeting in Japan later this week.

That will leave Eurozone leaders Chancellor Angela Merkel, President Francois Hollande of France and Prime Minister Matteo Renzi of Italy red-faced in front of their biggest international partners including the USA, China and Japan.

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