Greece's Creditors Weigh Extra Austerity Measures to Break Deadlock -- 2nd Update

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By Marcus Walker in Berlin and Viktoria Dendrinou in Washington

Greece's creditors are considering seeking extra austerity measures that would be triggered if Athens misses its fiscal targets, in a bid to bridge differences between Europe and the International Monetary Fund and break a deadlock threatening to unravel the Greek bailout.

Under the proposal, say officials involved in the discussions, Greece would have to sign up to so-called contingency measures of up to about EUR3 billion, on top of the package of about EUR5 billion in tax increases and spending cuts Greece and its lenders are already negotiating.

The idea, which has support from the eurozone's dominant power Germany, hasn't yet been agreed upon, and officials on the creditors' side say it would be politically hard for Greece's embattled government to swallow.

Creditors say the contingency-measures idea could finally overcome the monthslong disagreement between European institutions and the IMF about the outlook for Greece's budget. That disunity has paralyzed talks about what Greece needs to do to secure a new IMF loan program and unlock rescue funding from Europe.

Without billions of euros in fresh bailout funds, Greece faces bankruptcy in July, when large debts fall due. Months of talks without agreement have stoked concern in Europe about another Greek debt drama this summer, reviving fears the country could tumble out of the eurozone.

Greek finance-ministry spokespeople weren't immediately reachable for comment. Athens, however, has argued that imposing even-more austerity measures would go beyond what was agreed in the July 2015 bailout deal, according to people familiar with Athens's thinking.

The deadlock among creditors since last fall stems from Germany's insistence that Greece get no more money from the eurozone's bailout fund until the IMF agrees to lend more money too. Since Greece's bailout odyssey began in 2010, German Chancellor Angela Merkel has insisted IMF involvement is essential.

But the IMF is unconvinced by the math of the eurozone's July 2015 bailout plan for Greece. The fund says it can't resume lending to Greece unless there is a combination of a credible fiscal plan for Greece and debt relief from Europe.

The creditors and Greece agreeing on a fiscal plan would allow for the start of concrete talks on a second thorny issue: debt relief for Greece.

Germany is deeply reluctant to offer much debt relief, but tends to agree with the IMF about the weaknesses of Greece's budget, rather than with the more upbeat assessments of the European Union's executive arm, the Commission.

The Commission believes around EUR5 billion of austerity measures would be enough for Greece to hit a key target in the bailout plan: a primary budget surplus, meaning before interest payments, of 3.5% of gross domestic product.

But the IMF is more pessimistic about Greek growth and finances. It insists about EUR8 billion of savings are needed to hit the target. The European side's proposed measures, the IMF thinks, would only get Greece to a primary surplus of 1.5% of GDP.

The IMF is also skeptical about the 3.5% goal, viewing it as unrealistic, given Greece's depressed economy and its ruling left-wing Syriza party's aversion to major spending cuts. But Germany insisted this week the 3.5% target in the bailout agreement can't be changed.

So in recent days, European and IMF officials gathered in Washington for the IMF's spring meeting have explored contingency measures as the way for the creditors to reconcile their clashing forecasts and present a united set of demands to Greece.

The IMF wants the contingency measures to consist of pension cuts and the scrapping of tax exemptions, rather than increases in tax rates, says a person familiar with the discussions. The IMF thinks the EUR5 billion package of measures that Greece and creditors were negotiating in Athens in recent weeks already relies too much on growth-stifling tax increases.

Greek Prime Minister Alexis Tsipras has found it particularly hard to sell at home the kind of measures the IMF wants. Proposals to cut pensions and end tax exemptions, such as for farmers who pay little income tax, have already led to a wave of street protests in Greece this year.

Germany backs contingency measures, say people familiar with the matter, provided that Greece passes them into law now, so that they are triggered automatically if needed. Nonbinding promises wouldn't be enough for Berlin, which has little trust in Greek politicians' desire to implement overhauls, says a senior European official.

Since Greece's government is confident it doesn't need extra austerity to hit the 3.5% target, it should have no problem with the contingency measures, since they won't be needed if Athens is right, the European official said.

Write to Marcus Walker at marcus.walker@wsj.com and Viktoria Dendrinou at viktoria.dendrinou@wsj.com