Fresh worries over Greece’s debts have pushed the country’s borrowing costs sharply higher amid renewed insistence from Athens it will not swallow further austerity demands from international lenders.
The yields on two-year government bonds jumped to their highest level since last June and went above 10% to reflect growing anxiety on financial markets over Greece’s ability to keep up to date with debt repayments. Yields on 10-year government bonds were also higher at above 7.8%, the highest close since November.
The renewed focus on Greece’s debts came as the International Monetary Fund revealed its board was split over how far spending cuts in the country should go, raising fresh doubts over its participation in rescue plans for the struggling Greek economy.
The Washington-based fund has made repeated warnings that Greece’s debt burden of about €330bn (£280bn) is unsustainable despite the government pushing through spending cuts and tax increases that have badly hit popularity ratings for the government of prime minister Alexis Tsipras.
The IMF declined to join other international lenders – the European Central Bank and the European Union – in funding the country’s third bailout, agreed in August 2015, and it is currently deciding whether to take part in a new chunk of rescue funds needed by mid-2018. Germany has warned the IMF’s involvement is crucial if support for Greece is to continue.
News of a split on the IMF board raised new questions over whether Germany will see its wish granted for the fund joining the next rescue. In its latest annual review of the Greek economy, the IMF revealed that its board members were in disagreement over whether Athens should enforce even more austerity to satisfy its lenders.
Most of the 24-strong group agreed that Greece was on track to achieve a primary surplus of 1.5% of GDP, and should not make further cuts. However, another group on the board argued that Athens needed to tighten further to push its surplus up to 3.5% of GDP, the level agreed in its last bailout. A primary surplus refers to a government’s income exceeding its spending, excluding debt interest payments.
In a rare admission of an internal split, the IMF said: “Most Executive Directors agreed with the thrust of the staff appraisal while some Directors had different views on the fiscal path and debt sustainability.”
Those fiscal targets, and varying views over Athens’ ability to meet them, have been at the centre of the deadlock between the Greek government and its creditors.
Greece has lost more than 25% of its GDP – the biggest downturn to be experienced by an advanced western economy in peacetime – since its financial collapse seven years ago. There are worries it will not be able to reach the kind of surplus its lenders want to see without more spending cuts.
But responding to the IMF report on Tuesday, Jeroen Dijsselbloem, head of the Eurogroup of finance ministers, said Greece was not in quite the state the Fund had claimed. Dijsselbloem said the report was outdated and that it failed to account for recent growth in the Greek economy.
“It’s surprising because Greece is already doing better than that report describes,” he told Dutch television, according to news service Reuters.
Dijsselbloem also said that Greece’s creditors would still be prepared to ease terms of Greece’s debt further, if the country continues to cooperate on reforms. But he ruled out the prospect of Greek debt being forgiven, or cancelled altogether.
The Greek government, which faces more debt repayment deadlines this summer, said it was hoping for a “positive conclusion” to the protracted review of its bailout programme. A resolution would help unlock disbursements from the latest bailout that are needed to pay for these debt repayments but may also open the way for Greece’s bonds to be included in the European Central Bank’s bond-buying programme, a development that in turn would likely lower Greece’s high borrowing costs.
But Greek government spokesman Dimitris Tzanakopoulos also insisted Athens was not about to yield to demands for it to implement more austerity after the bailout scheme ends in 2018.
“The government’s position is clear and it has been expressed categorically … Our aim is to not yield to illogical demands by the International Monetary Fund, which insists on legislating precautionary (austerity) measures after the programme ends,” he said.