Answer:
God is perfectly merciful in that he perfectly displays the virtue of mercy. This means that he is merciful to the right people, at the right time, to the right degree, with the right motive, and in the right circumstances. But some people and some circumstances are not the right ones. It is not appropriate to forgive a person's sins when he is defiant and unrepentant. It may be appropriate to continue trying to lead him to repentance, but it is not fitting for him to be forgiven even before he has admitted he was wrong.
God is perfectly merciful in the sense that he is merciful in the best way, not in the sense that he forgives every single sin people commit. Some sins (those of which people have not repented) are not appropriate to forgive, so God's mercy is the very thing that prevents him from forgiving them.
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