Greek Euro Exit Unavoidable if IMF, Euro Zone Can't Agree

The Wall Street Journal

By COSTAS PARIS

The International Monetary Fund and Europe are still far from finding a common formula to tackle Greece's explosive debt crisis, with the IMF insisting on a "haircut" on the principle that Athens owes its creditors, while euro-zone governments dismissed the proposal because of political repercussions.

The row could lead to an IMF withdrawal from the Greek program and an end to the Fund's financing of Athens. And while Europe can take on the IMF part of the lending in the short term, a refusal to restructure the debt will result in a giant gap that will be impossible to fill. European tax payers will push their governments to stop financing Greece and the country will default and be forced to print its own currency.

So the question is whether Germany and its Chancellor Angela Merkel, who has the biggest say on the fate of the euro zone, genuinely believes that Greece must remain in the euro as she repeatedly proclaims. If she does, she will have to go to the German parliament and ask approval for a Greek write-down, which could wreck her chances of re-election next year.

But the alternative could be equally explosive. A Greek exit could well come before the German elections and the contagion effects on other bailed out countries such as Portugal and soon to be Spain may be disastrous. Many economists have described such a scenario as the "end of the euro zone" and judging from the slow pace and indecisiveness that the Eurogroup has shown so far on tackling the continent's debt crisis this may well be the case.

So the need for an agreement between the euro zone and the IMF is paramount. The IMF as a senior creditor can't accept losses of its own in the Greek program and it has to convince unhappy members from the emerging world that lent it money to continue financing Greece that the country's debt is sustainable. For this to happen, about 50 billion euros ($65 billion) must be forgiven from Greece's giant debt and the decision for such action including the political backlash is squarely in Europe's court.

There are ways that the Europeans can make it happen. One would involve the European Stability Mechanism, a newly activated bailout mechanism that would take over the recapitalization of Greek banks, which is set to cost €50 billion, instead of the amount being added to the country's debt. Another way would be the European Central Bank accepting losses to the Greek bonds it holds. But both options go against existing charters and the political will to change the rules isn't there.

Meanwhile Greece will run out of money sometime next month. Athens is anxiously awaiting a decision by its troika of creditors—the euro-zone, the IMF and the ECB—to approve the release of a €31 billion loan payment so to stay above water. In typical fashion the creditors are demanding from Athens another set of painful austerity cuts which the country can't afford and the IMF is openly saying that it won't sign off on the loan payment before a haircut takes place.

Europe's efforts to save Greece and keep the euro zone intact is now facing its biggest challenge. After two years of kicking the can down the road hoping that things will somehow get better, the time of reckoning is here.