EU, IMF clash over Greece reignites debt crisis fears
(Reuters) - A clash among Greece's international lenders over how long to give the stricken country to get its debts down to a sustainable level reignited fears on Tuesday that the euro zone debt crisis could flare up anew.
Euro zone finance ministers suggested on Monday that Greece should be given until 2022 to lower its debt/GDP ratio to 120 percent but International Monetary Fund chief Christine Lagarde insisted the existing target of 2020 should remain.
"We clearly have different views. What matters at the end of the day is the sustainability of Greek debt so that country can be back on its feet," Lagarde said in an unusually public airing of disagreement.
Behind her sharp exchange with Eurogroup chairman Jean-Claude Juncker lies a rift over whether euro zone governments need to write off some of Greece's debt to make it manageable. IMF officials have pressed for such a "haircut" while Germany, the biggest contributor to euro zone bailout funds, has vehemently rejected it as illegal.
Greece was living beyond its means even before it joined the euro. After it adopted the single currency, public spending soared.
Public sector wages, for example, rose 50% between 1999 and 2007 - far faster than in other eurozone countries.
And while money flowed out of the government's coffers, its income was hit by widespread tax evasion. So, after years of overspending, its budget deficit - the difference between spending and income - spiralled out of control.
When the global financial downturn hit, therefore, Greece was ill-prepared to cope.
Debt levels reached the point where the country was no longer able to repay its loans, and was forced to ask for help from its European partners and the International Monetary Fund (IMF) in the form of massive loans.
Criticism with the international banks on this subject duly lies with the fact that in their absense Greece could not have joined the Euro - it was the those banks which arranged long term off balance sheet currency swops which masked Greece's true financial situation.