May 23, 2016 / 2:29 PM / 3 years ago

Greece to get lenders' OK for new loans on Tuesday, but no debt relief yet

BRUSSELS (Reuters) - After a six month delay, the euro zone is likely to say on Tuesday that Greece has passed the reforms needed to unblock 10 billion euros (7.7 billion pounds) in new loans, but Athens won’t get debt relief because of differences between the bloc and the IMF.

Demonstrators display the Greek flag in front of parliament in Athens, Greece July 15, 2015. REUTERS/Yiannis Kourtoglou

To meet the conditions for the loans, without which Greece would again default in July, the government introduced pension and income tax reforms, as well as measures to privatise state assets and deal with bad loans.

It also approved contingency measures that would kick in automatically if Greece were to miss its primary surplus target of 3.5 percent of GDP in 2018, as the International Monetary Fund believes it will.

“I’m hopeful that we can finish the review and pay about a 10 billion euro loan tranche, which will take away some of the so-called Grexit pressure and hopefully brings private investors back to Greece,” Finnish Finance Minister Alexander Stubb said.

The approval of the Greek reforms, called in EU jargon “the review”, was also a key condition for the euro zone to start discussions on debt relief for Athens.

Cutting the debt burden is important politically for Greek Prime Minister Alexis Tsipras, and was demanded by the IMF in return for it taking part in the latest bailout.

Germany and several other countries are very keen to have the IMF on board to add credibility to the bailout process, but Berlin strongly opposes the debt relief that the Fund insists on.

Euro zone ministers issued their first guidelines on the debt relief talks on May 9, underlining that Greece’s huge public debt could be made sustainable through extending maturities, grace periods and fixing interest rates.

But while the euro zone believes it will be enough to extend the average weighted maturities by five years, cap interest at 2 percent and set maximum annual loan repayments at 1 percent of GDP until 2050, the IMF thinks more is needed.

The Fund believes that to make Greek debt sustainable, the euro zone would have to extend the grace period on all their loans to Greece until 2040 and their maturities to 2080 and set a fixed interest rate of 1.5 percent until 2045.

More importantly, all these measures would have to be decided now the IMF says, rather than made conditional on Greek reform implementation in the coming years as the euro zone would prefer. Otherwise, the IMF says, Greece would not restore investor confidence and it would be under a perpetual bailout.

Finland’s Stubb said last week a deal on debt relief was unlikely on Tuesday.

“I’m not hopeful that we could reach a decision on debt relief,” he said. “The views (of IMF and the euro zone) are very far from each other.”

A German official, speaking on condition of anonymity, said the IMF’s position was unacceptable and that a deal on Tuesday was unlikely.

Instead, Germany was counting on IMF Managing Director Christine Lagarde convincing others in the Fund to drop their demands on a debt relief decision now and settle for a debt relief road-map that contains no firm commitments, but is conditional on reforms and data.

Reporting By Jan Strupczewski, additional reporting by Gernot Heller in Berlin; Editing by Toby Chopra

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