Euro zone mulls new ways to cut Greek debt mountain

By Jan Strupczewski

Euro zone officials are considering new ways to reduce Greece’s huge debt because delays in reforms by Athens and continued recession have put the target of 120 percent debt to GDP ratio in 2020 out of reach, euro zone officials said.

A Greek debt sustainability analysis prepared by the International Monetary Fund, the European Central Bank and the European Commission in March forecast Greek debt would rise to 164 percent of GDP in 2013 from around 160 percent in 2012 under a baseline scenario, assuming the Greek economy stopped contracting next year.

But Greece now expects its economy to shrink for the sixth year running in 2013, eyeing a 3.8 percent contraction that would boost its debt ratio to 179.3 percent.

“At the moment it looks like Greece’s debt level will rise to well above the target of 120 percent of GDP by 2020,» ECB Executive Board member Joerg Asmussen told the Sueddeutsche Zeitung newspaper.

To bring it back towards the desired level in 2020, Greece could organise voluntary buy-backs of its bonds, he said.

“One has to consider elements that could make it possible to achieve that goal. One possibility would be buying back debt,» Asmussen said.

The money could not come from the ECB, but it could be lent by the European Stability Mechanism, for example, one senior euro zone official, who was in Tokyo for the weekend meetings of the International Monetary Fund and World Bank, said.

Because Greek bonds trade at very deep discounts, one euro of money borrowed from the ESM, the euro zone’s permanent bailout fund, could reduce Greek debt by 1.5 euros, offering good leverage, the official said.

Another ECB Executive Board member, Benoit Coeure, said the central bank would not consider rescheduling the Greek debt portfolio it held — a suggestion repeatedly made by Athens.

A second euro zone official said that while borrowing from the ESM would in itself increase Greek debt, there was another way to reduce it.

“What could change the overall level of debt is that, at some later stage, when banks can be directly recapitalised by the ESM, we could convert some of the euro zone loans for bank recapitalisation into equity and this could help the debt ratio, but this is not going to happen before the end of next year,» the second official said.

The euro zone’s temporary bailout fund, the European Financial Stability Facility, has already lent Greece 25 billion euros (20 billion pounds) to recapitalise banks, and 23 billion more is awaiting disbursement.

The 48 billion euros would be a sizeable chunk of Greece’s total debt, currently estimated at around 330 billion euros.

Athens could also use proceeds from the privatisation of state-owned assets to retire debt, the second official said.

“Another way could be to use privatisation receipts to buy back debt,» the official said. «The privatisation process is finally kicking in, the structure is ready. You could expect a few billion euros from privatisation to buy back debt. This could happen relatively quickly.”

The debt sustainability analysis from March estimated Greek privatisation revenues by 2020 at 45 billion euros, with 12 billion coming in 2012-2014.

The IMF is pushing for euro zone governments to restructure the debt that Athens owes to them — almost 53 billion euros lent under Greece’s first bailout programme and 14.4 billion already disbursed under a second bailout.

The euro zone could also further lower interest on the loans for the first programme, which now stands at 150 basis points, or lengthen the loan maturities or increase the moratorium time when interest does not have to be serviced.

But officials said there was very little appetite among euro zone countries for a restructuring of official sector loans to Greece.

To help Greece return to growth, the euro zone and the IMF are discussing giving Athens an extra two years to reach a primary surplus of 4.5 percent of GDP, pushing back the date to 2016.

Greece has said two extra years in financing would cost 13 billion to 15 billion euros and officials said the euro zone realises it will need to come up with the money. But no decision on the financing has been reached yet.


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