Rehn insists euro deal will make Greek debt sustainable

The European Unions Economic and Monetary Affairs Commissioner Olli Rehn said on Friday that heightened concerns about the viability of Greece?s debt are ?not warranted? as he set out plans to step up efforts to strengthen the EFSF bailout fund amid fears about the economic crisis gripping Italy and Spain.

?Investors seem unconvinced that Greece’s debt will be put on a sustainable track,? said Rehn in a statement that backed the steps agreed by eurozone leaders? in Brussels last month. ?I think this is not the right conclusion. The 21st July agreement did deliver major improvements in the terms and conditions for financing Greek public debt. There will be a significant extension in the average maturity of all loans and a lowering of interest rates on official loans.

?A reduction of interest rates to about 4% should reduce cumulative interest payments by some 25 billion euros between 2011 and 2020. This implies a reduction in the debt ratio in 2020 – without private sector involvement – of around 10% of GDP.?

Rehn said the private sector involvement (PSI), which will see banks swap or rollover the Greek debt they hold, would also help Greece.

?PSI considerably stretches the average maturity of Greek government debt even further and reduces substantially the amounts that Greece will have to raise in the markets by the end of the programme in 2014. PSI and the accompanying debt buy-back entail a further estimated net debt reduction by some 26 billion or 12% of GDP by 2020.?

Economists have pointed out that any reduction in debt is offset by the fact that Greece will have to invest money to prop up its banks and to buy top-rated bonds to act as collateral in its swap with private investors. Rehn insisted, however, that Athens would be better off.

?It is correct that PSI entails certain costs, but these costs impact more on gross debt than on net debt. The costs relating to PSI include the recapitalisation of Greek banks (20 billion euros) and credit enhancements (35 billion euros), in the form of AAA rated bonds paid on an escrow account, for the new government bonds that are exchanged for existing bonds maturing during the period 2011-20. This escrow account is an asset for the Greek government and has a positive impact on net debt.?

Rehn insisted that Greece is taking the steps expected of it following the July 21 agreement.

?The Greek authorities are doing what is necessary to implement their various commitments. They are developing the proposals for the PSI along the lines of the IIF proposal. Preparatory work is continuing for the new support programme for Greece, in liaison with the ECB and together with the IMF.

?The Commission’s Task Force set up at the end of July is starting to coordinate technical assistance to Greece. Importantly, it will help ensure measures are taken to accelerate take-up of EU funds which make a visible impact on competitiveness, growth and employment.?

Rehn also stressed the need for eurozone governments to speed up the approval of the bolstering of the European Financial Stability Facility amid concern that it would not be able to cope with having to bail out Italy and Spain as well as Greece, Portugal and Ireland.

Asked whether the fund needed to be substantially bigger than currently to calm market turmoil, Rehn said he did not want to get into talking about numbers, but added:

“To be effective the EFSF needs to be credible and respected by the markets. And therefore we need to be continuously assessing it, once up and running, in its objective form with these goals in mind.»

Rehn also said that the main message from Commission President Jose Manuel Barroso in a letter to EU leaders on Thursday was for them to move swiftly to implement a deal over Greece.

“It is now essential to speed up the implementation and the approvals in the member states in order to make this agreement of the 21st July materialize. That was the key message. I think that’s obvious that that is what needs to be done.»

He said EU officials would also look at longer-term options for the infrastructure of the euro zone, including the idea of euro zone bonds, and would present a report after the summer.