Greece Fails To Reach Deal With Lenders: Lagarde Flip-Flops, Sees "No Need For Greek Debt Haircut"

Submitted by Tyler Durden on 04/22/2016 08:27 -0400

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Greece was supposed to finalize a deal today with its lenders whereby in exchange for an "agreement" to implement already agreed upon budget cuts it would receive more funds from the Troika. However, as Reuters reports, "there will be no deal between Greece and its lenders on Friday that would unlock loans and enable vital debt relief talks, despite some progress on the reforms Athens must implement in exchange, euro zone and IMF officials said on Friday."
"Don't expect any deals today," the chairman of euro zone finance ministers Jeroen Dijsselbloem told reporters, noting however, he was "hearing good news from Athens" on headway made in negotiations on a Greek reform package.
"There is more work to be done. We are determined to continue the work. We're not there yet," International Monetary Fund Managing Director Christine Lagarde said.

As has been the case since the third Greek bailout which everyone agreed upon after last summer's volatile Greek events, the package of Greek reforms is aimed at producing a primary surplus of 3.5 percent of gross domestic product in 2018 "and beyond." The problem, however, is that Greece has failed to omplement it. As a result, there remains disagreement between Greece, the euro zone and the IMF on whether the measures, which include pension and income tax reform and setting up a privatization fund and a scheme to deal with bad loans, will be enough to reach that number.
The IMF believes that as things stand now, instead of 3.5 percent of GDP, Greece will only achieve a primary surplus - the budget surplus before debt-servicing costs - equivalent to 1.5 percent of economic output in 2018. The Fund and the euro zone are also at odds over how long Greece will be able to maintain a primary surplus of 3.5 percent and therefore its ability to service its public debt in the long run. The debt stood at 177 percent of GDP last year.
Germany and several other countries believe that with proper reforms Greece can keep such a surplus for decades and point to the fact that the country does not need to service its debt for the next seven years.
But while until recently the Fund said this was unrealistic, and therefore the euro zone must grant the country debt relief through extending maturities and grace periods, following the recent fallout from a leaked IMF conversation which Greece interpreted as an IMF "blackmail" that could seek another credit "event", Lagarde appears to have backtracked. From Market News:

• LAGARDE: BELIEVE NO HAIRCUT IS NEEDED; MAY NEED RE-PROFILING
• LAGARDE:REPROFILING OF GREEK DEBT WLD BE TRIGGERED WHEN NEEDED

And just like that Greece appears to have lost its biggest outside sponsor when it comes to the much desired credit cut.
Dijsselbloem added fuel to the fire, saying "debt is a discussion we've not had before. The only thing we had was a promise that if the Greeks would commit fully and deliver on the program we would look at, if necessary, further debt measures." For now Greece has yet to deliver on anything.
Germany's position on the topic has been also clear all along. Finance Minister Wolfgang Schaeuble said debt relief talks were not a priority. "That is not in the foreground. What is in the foreground is what has been agreed last year must be implemented," he said, referring to fiscal targets set last August.
Officials said differences over reforms in Greece have narrowed substantially in the last few days and have flagged the possibility of calling an extraordinary meeting of euro zone finance ministers on April 28 to clinch a deal.
Still there is hope that a deal will be reached in the near future. One official close to the talks said some differences were as small as 100 euros.
"Right now only immaterial discrepancies remain," the official said, adding the main difference now was over personal income tax credits, which now stood at 2,100 euros.
The IMF believes that Greece should not raise taxes further, but broaden the tax base by eliminating lots of existing exemptions, which it said now effectively exempted 55 percent of Greek households, while the euro zone average was 18 percent. "The IMF insists on a reduction to 1,800 euros and the Greeks have come down to agreeing to 1,900 euros," the official said. "The difference is 0.1 percent of GDP, which is less than 200 million euros out of a package of reforms worth 5.4 billion euros," the official said.
For Greece, however, even the smallest concessions seem virtually impossible, as the Syriza government, already having been overtaken by New Democracy in some recent polls, faces increasing popular anger in pushing through precisely the same "hated" cuts that it promised it would eliminate when it was elected one year ago.
Finally, with summer just around the season, it means more worker strikes are imminent, and with them even greater cuts to economic growth.