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BRUSSELS—Greece’s international creditors are considering making debt relief for Athens conditional on reforms in a bid to keep a grip on the country’s economic policies after its bailout program finishes, according to several officials directly involved in the discussions.
How to ease Greece’s debt—which stands at a heavy €320 billion ($434 billion), or roughly 174% of gross domestic product—is a question that has dogged euro-zone countries, the International Monetary Fund, the
European Commission and European Central Bank since November 2012.
Poul Thomsen of the International Monetary Fund arrives for a meeting with Greek government officials at Finance Ministry in Athens on July 14. Associated Press
That was when euro-zone countries, the main financers of the bailout, said they would find ways to bring Greece’s debt down to a “sustainable” level, in part to counter IMF concerns. Debt targets were set at 124% of GDP by 2020 and “substantially below” 110% of GDP by 2022.
As of March 2013, some 66% of Greece’s debt stock is held by euro-zone governments and the IMF, which scrambled to stop the country from defaulting in 2010 and have been financing it ever since.
The euro zone’s contribution to the bailout officially runs out at the end of this year, while the smaller IMF component will continue being disbursed until March 2016.
Until now, creditors have put pressure on successive Greek governments, often reluctant to push for painful reforms, by withholding loan installments.
But as Greece hopes to wean itself off the international assistance, with its prime minister, Antonis Samaras, insisting it won’t need a third bailout, the creditors’ grip on economic reforms looks set to loosen.
That is why European creditors are eager to make debt-relief steps, in particular the extension of its debt-repayment schedule, conditional on Greece meeting policy milestones, officials said.
The debt talks are expected to resume in earnest in the fall but preparatory work is already under way.
Despite the IMF’s insistence that euro-zone countries forgive some of Greece’s debt outright, the European side is only prepared to make adjustments to repayment terms. These could slightly dent the debt stock over the long term and make the task of paying it back easier. The IMF has said it won’t change any of the repayment terms for its own component, as that would be a breach of its rules.
The first bailout included €53 billion in bilateral loans to Greece from 15 euro-zone countries. The interest rate on that facility is adjusted quarterly to half a percentage point over three-month Euribor, the benchmark rate at which major banks lend euros to each other. Several euro-zone officials participating in the talks said there is a consensus to cut that by half a percentage point. The reduction would lower Greece’s debt only modestly over time, officials noted, but lowering the rate any more would mean that countries facing steeper borrowing costs themselves would start losing money on their assistance to Greece.
From the second Greek bailout, some €140 billion comes from the temporary euro-zone bailout fund, the European Financial Stability Facility. Its chief, Klaus Regling, has said there is no space to cut the interest rate on that part of the loan because it would directly translate into losses for the fund.
But the maturity of the loan, now standing at just over 30 years with a grace period until 2022, could be extended by 10 to 20 years to spread out the installments.
Another piece of the puzzle is the Greek bank-recapitalization fund, known as the Hellenic Financial Stability Facility. The fund was endowed with €50 billion from the bailout to recapitalize Greek banks, of which some €11 billion remains unused.
Provided that upcoming stress tests of euro-zone banks’ balance sheets by the ECB, due to be concluded in October, don’t throw up unpleasant surprises for Greek banks, that €11 billion could be repurposed, officials said.
One way to use them would be to plug any holes in Greece’s finances beyond 2014, averting an embarrassing third bailout.
Officials are also examining an idea to “lock in” the interest rate on Greece’s EFSF loans over an extended period. EFSF rates are currently fluctuating, depending on the borrowing costs the fund faces in the market.
The measure is controversial as some officials argue that the move would add a premium as high as one percentage point to the rate Greece currently pays to the EFSF, pushing it well above 2%. But that would still be lower than what Greece would pay in the market—and would provide long-term certainty about its future interest-rate bills.
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Still, the proposals from the euro-zone side could fall short of the IMF’s expectations, says Mujtaba Rahman, Europe director at Eurasia.
“Given that the odds of no third bailout are rising, it is likely debt relief will be tied to some reform milestones. But such minimal oversight by the Europeans is unlikely to be enough to keep IMF money flowing,” Mr. Rahman said.
“The IMF’s experience in Greece will make them cautious, as even with serious conditionality, full Troika [Greece's international creditors] oversight, and extensive peer pressure, the Greek government has only been in compliance with a fraction of its commitments.”
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http://www.olympia.gr/, 17/7/2014