I.M.F. and Central Bank Loom Large Over Greece’s Debt Talks

By PETER EAVIS, JACK EWING and LANDON THOMAS Jr.MAY 10, 2015

The New York Times

Greek leaders have fought fiercely in recent months with politicians from other European countries over relief on Greece’s vast debt load.

Yet the power to decide the fate of Greece lies not just in the hands of these national governments, but also with unelected officials at two powerful institutions: the European Central Bank and the International Monetary Fund. Each is a creditor to Greece, and each is expecting the country to repay it billions of dollars of debt in the coming weeks.

The influence of the E.C.B. and the I.M.F. will be felt behind the scenes on Monday, when finance ministers from Greece and other European nations meet in their latest effort to break an impasse that is paralyzing the Greek economy and frightening global markets.

Greece is expected to repay 750 million euros, or $840 million, to the monetary fund on Tuesday as scheduled. For the rest of the year, however, its debt repayments to the fund and the central bank total nearly €12 billion.

The politicians at the meeting are racing against the clock to forge a deal that would give Greece enough money to repay both this summer.

In theory, both institutions could greatly ease the situation by agreeing to delay repayment, or even forgiving some of their Greek debt. But they see themselves as a special class of creditors — so-called lenders of last resort — that should not write off the money they lend.

Still, some sovereign debt specialists say that there is a case for the monetary fund to take a hit on its Greek loans. The institution, they assert, backed the policies that deflated Greece’s economy, making it harder for Greece to service its debt.

“There is no question in my mind that the I.M.F. needs to be part of the debt forgiveness,” said Ashoka Mody, a visiting professor at Princeton and formerly a senior official at the fund. “At some point, you have to give up this orthodoxy of saying, ‘This is the right way of doing things.’ This is an unusual case.”

Debt forgiveness from the central bank has even broader support from outside investors and economists because the bank avoided taking a loss on €27 billion worth of Greek bonds in its portfolio while private sector investors lost more than half of their money in the 2012 Greek debt restructuring.

Still, there has been no sign that either institution is considering yielding on its payment schedule. If there are no concrete signs of progress in the talks Monday, a majority of the central bank’s governing council would be in favor of placing additional restrictions on lending to Greek banks as early as this week, people briefed on the council’s discussions said.

“Their interest is to get their money back,” said Zsolt Darvas, a senior fellow at Bruegel, a research organization in Brussels.

Greek officials, meanwhile, have contemplated steps that would test the institutions’ hard-line stance.

Discussions in the Greek government have included assessing the pros and cons of not paying the central bank and the monetary fund, said two people who were briefed on the discussions but who spoke on the condition of anonymity.

In such a case, which was described as a last-ditch option and not a plan for action, Greece would keep paying debts owed to private sector bondholders and other European governments.

Such discussions may be part of an oft-criticized gamesmanship by the Greek government since it came to power in January. It is entirely possible that an agreement of some sort will be struck in the next few days or weeks, as brinkmanship gives way to lasting compromise. Greece may even be able to scrape together money to get partly through the summer by tapping cash pools at various municipalities.

But a few of the debt specialists advising Yanis Varoufakis, the Greek finance minister, contend that they have a strong intellectual case for defaulting on debt owed to the central bank and the monetary fund. For too long, they assert, Greece has been stuck in a cycle of having to borrow more money to pay off maturing debts. And each time it borrows more, it must accept economic austerity measures that deflate its economy.

A result, they argue, is that five years after Greece’s first bailout, the nation’s economy has contracted by a quarter, and its debt burden is approaching 200 percent of its gross domestic product.

From the day the notion was pitched a bit more than a month ago, it has been seen as an approach to undertake only at the very end of the road. But as time has gone by and the perception has grown in the government that Greece’s creditors will not budge, the idea — radical and risky as it may be — has begun to take shape. Still, no move toward such an option appears imminent.

While Mr. Varoufakis has told Christine Lagarde, managing director of the monetary fund, and Mario Draghi, the president of the central bank, how onerous these obligations have become for Greece, he has not threatened to stop payment.

And not everyone in Mr. Varoufakis’s brain trust embraces the approach. One senior adviser who was not authorized to speak publicly said that while he was supportive of a hard line with the central bank, defaulting on the monetary fund loan risked lumping Greece together with financial pariahs.

Some outside analysts expressed the same sentiment.

“For a country which has no access to the markets to not pay the I.M.F. — that just does not seem like a way forward,” said Frank Gill, a Greece specialist at Standard & Poor’s in London.

It would of course also be a high-stakes gamble for Greece to do anything that could undermine relations with the central bank, which is shoring up Greece’s banking system. It has lent Greek banks more than €110 billion, cash the lenders need to operate but would have trouble raising on international money markets.

The support to the banks is not the debt that the officials in the Greek government would consider for default. Instead, the idea would be to not repay Greek government bonds held by the central bank. Greece is scheduled to repay nearly €7 billion on those this summer.

If the Greek banks could not repay their central bank loans, the losses would be passed on to other eurozone countries. An outcry would come from Germany and other countries already fed up with what they regard as Greece’s misbehavior. The central bank’s credibility — probably a central bank’s most important asset — could be damaged.

Still, the central bank’s deep caution about financial stability would most likely limit how hard it pressed Greece. As the guardian of the single currency, the central bank may not want to do anything that could set off a chain of catastrophic events in Greece’s banking sector that could lead the country to quit the euro.

“The E.C.B. does not want to be responsible for precipitating a crisis,” said Mujtaba Rahman, practice head for the European Union at Eurasia Group, a political consultancy. “They are very, very concerned about having blood on their hands.”