But creditors weren’t keen to entertain a debt restructuring during Greece’s latest negotiations, which were focused on a second five-month extension of the country’s now-lapsed second bailout program. Before Tsipras called a referendum on an earlier proposal from creditors, lenders said they were close to a deal on an extension both sides could live with, as well as steps toward a third multi-year bailout agreement that would likely feature debt restructuring. (I know, I know—stay with me here.)

A sweet and sour deal

As Greece’s creditors are eager to stress, the country’s bailout loans, as big as they are, benefit from incredibly generous terms. They are “by far the most favorable lending conditions ever granted” to a country by the euro zone’s rescue fund, it says. Indeed, it costs less for Greece to service its debt than most of the other “PIIGS” in the euro zone’s troubled periphery:

And, as the think tank Bruegel explains, since some quirky features of Greece’s bailout loans aren’t captured by official statistics, the effective cost of servicing Greece’s debt is closer to France and Germany than Italy or Portugal. So why is debt restructuring such a seemingly urgent issue?

For one thing, the sheer size of the country’s debt means that favorable interest rates and lenient repayment schedules still aren’t enough to make bills small enough for the cash-strapped state to pay. Greece’s annual financing needs are currently running at around 25% of GDP, well above the IMF’s recommended limit of 15%.

Greek Finance Minister Yanis Varoufakis talks to International Monetary Fund (IMF) Managing Director Christine Lagarde (R) during a euro zone finance ministers meeting.
Seeing eye to eye?
Image: Reuters/Francois Lenoir

More importantly, the austerity measures (tax hikes and spending cuts) that lenders made Greece impose in return for bailout funds have savaged its economy (pdf). Before he became finance minister, Yanis Varoufakis described these conditions as akin to “fiscal waterboarding.”

Over the past five years, Greece has cut its fiscal deficit further and faster than just about any other country, ever. The wrenching effect on the economy has pushed unemployment to dizzying heights and drained the government’s resources, making all manner of debt service difficult. Even so, creditors are also quick to note that government foot-dragging on reforms—namely, improving tax collection—and privatizations haven’t helped Greece’s case either.

Whatever the case, more austerity alone won’t fix things—a big and decisive debt restructuring is crucial to putting Greece’s fiscal house back in order.

The blame game

This is why the IMF’s public, official acknowledgement that debt relief is needed is newsworthy. Until now, the fund’s forecasts of Greece’s debt dynamics have been fanciful:

All of the key players in the bailout negotiations now believe, to varying degrees, that debt restructuring is needed. This is not to say that including a writedown in a future bailout will be easy—after all, if Greeks vote to reject the (now expired) bailout conditions in the referendum, all bets on more aid are off.

If the Greeks and its lenders are still talking to each other next week, the IMF’s analysis will significantly alter the tone of the discussion. Throughout Greece’s bailout drama, euro zone creditors have relied on the IMF for its expertise and guidance as much as its financial capacity. This led the fund to be denounced as a toady to euro hardliners, bullied into going against its own advice by approving a series of doomed rescue programs.

Now that the IMF has owned up to the unsustainability of Greece’s current path, there is hope that it will use its clout to finally put an end to this sorry saga. That is, if it gets another chance.

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