Eurozone holds the key to Greek debt sustainability

Athens proposes extension and a fixed instead of floating rate By Sotiris Nikas

The eurozone is responsible for almost three-quarters of the Greek state’s debt, which automatically puts it in control of the country’s obligations and explains the why the Greek government is trying so hard to have the terms of the repayment of loans altered.

Eurostat data released on Thursday showed that after Greece’s entry to the European Stability Mechanism, and particularly after the PSI debt restructuring and the bond buyback program in 2012, the country’s debt was passed on from the private to the official sector, mainly the eurozone and the International Monetary Fund, to avert a Greek default.

Last year 75 percent of the Greek national debt concerned loans issued by the eurozone and the IMF, with the remaining 25 percent in the hands of private investors. As a result, it would be very difficult for Greece to default on its debt.

In this context Athens has chosen to apply light pressure on its eurozone peers for the amendment of its loan terms. Since the bloc will in no way accept any talk of a loan haircut at this stage, the next solution would be to proceed to moves that would appease the markets regarding the management of the debt.

A Greek proposal that the eurozone is examining provides for a new extension to the repayment time for these loans. The core of the proposal foresees the extension of the maturity period from 30 to 50 years, so as to make sure Greece will not have any problems servicing its debts for several years to come.

Furthermore if the eurozone accepts another Greek proposal to turn the floating interest rate into a fixed one for the bilateral loans to Athens from its peers, then the interest payment needs would be significantly reduced. That would banish another risk factor for the Greek state budget in the next few years.

The situation wherein the eurozone holds the bulk of the Greek debt will take years to change, and will necessitate the country’s full access to international money markets.