International Monetary Fund faces pressure from Germany over Greece

In Europe’s battle with the International Monetary Fund over Greece, Germany has a way to win.

Germany, Europe’s dominant economic power, is leaning heavily on the IMF to accept hypothetical assurances that Greece’s debt burden will be addressed in the future if needed, rather than the definite and far-reaching debt relief that the IMF wanted, according to people familiar with the talks.

Berlin believes the IMF will have to accept what’s on offer, even if IMF staff are unhappy about it, these people say. The IMF is also under heavy European pressure to accept Greek austerity policies that are less specific than the cuts the IMF wanted. An accord hasn’t been reached yet, and some warn it could take several weeks.

The IMF’s Achilles' heel: Its board is controlled by Germany, other European Union countries, and the U.S., none of whom want a new crisis over Greece. That power reality weakens the IMF’s threat to pull out of the Greek bailout if it is unsatisfied.

The EU currently faces multiple challenges that threaten to unravel the 60-year-old project of European integration, including the U.K.’s referendum on leaving the bloc, the migration crisis, and the rise of EU-skeptic populist parties. Germany and other European governments have no appetite for another round of brinkmanship over Greece like in 2015, and want a deal in coming weeks that settles Greece’s future—at least for now.

Any deal is nevertheless likely to include some important concessions to the IMF. German Finance Minister Wolfgang Schäuble—who until recently adopted the hard-line stance in public that Greece needs no debt relief at all—has already permitted discussions to start this week about how eurozone loans to Greece might be restructured in the future.

A deal, which many European officials are now confident of reaching in late May or early June, is expected to include a promise by Germany and other eurozone countries to keep Greece’s debt burden below a certain threshold. That promise would entail easing the terms of Greece’s loans “if necessary.”

Crucially for Berlin, however, any decision to restructure the loans would be delayed until 2018—after Germany’s 2017 elections. Mr. Schäuble and his boss, Chancellor Angela Merkel, are determined to avoid, for now, any material change to Greece’s bailout plan that would force them to hold an awkward debate in Germany’s parliament, the Bundestag, according to people familiar with their thinking.

An accord on Greek debt and austerity would allow Athens to stay afloat this summer, when large bonds fall due. But it is unlikely to resolve the country’s seven-year-old debt crisis. Participants in the troubled bailout are braced for further drawn-out negotiations in coming years about Greece’s fiscal and other overhauls.

The main source of this year’s re-escalation of the Greek debt saga is Germany’s insistence that it cannot release any further bailout funds unless the IMF agrees to resume its own lending to Athens. IMF lending has been in limbo since last July, when IMF staff stated that “Greece’s public debt has become highly unsustainable.”

The IMF is also struggling to uphold its demands on Greece’s fiscal overhauls. IMF head Christine Lagarde, in a letter to eurozone finance ministers last week, rejected Greece’s proposed formula for extra savings in case fiscal targets are missed as “ad hoc,” “not very credible” and falling short of proper reforms to Greece’s public sector.

On Monday, however, Europe accepted a modified version of Greece’s proposal. The agreement leaves open how Greece would make its budget savings permanent. The IMF previously wanted Greece to legislate concrete measures, but is now likely to win only a looser commitment, leaving many policy specifics to be negotiated in the future, according to people close to the talks.

Here too, the IMF has come under pressure from its shareholders to dilute its demands on Athens.

Greece’s finance minister, Euclid Tsakalotos, has succeeded in convincing Mr. Schäuble that further cuts in pensions, as the IMF wanted, are politically beyond what the Greek government can deliver, say people familiar with the matter.

Germany brought the IMF into the first Greek bailout back in 2010, against the wishes of many other European countries, to help enforce tough overhauls in Greece. Keeping the IMF on board is politically and legally necessary if the Bundestag is to release further rescue loans for Athens, German officials say.

But German leaders have grown irritated with the IMF’s pessimistic forecasts about Greece’s finances, which have made it harder to reach a deal to keep Greece afloat this year. IMF forecasts have often been wrong, so its view can’t be treated as infallible, Berlin officials say.

Mrs. Lagarde’s letter last week countered such criticism. She argued that Europe’s assumptions about Greece’s future financial health are “unrealistic.”