Greece expects the euro zone to provide some debt relief to Athens later this year but the impact on its vast liabilities will be little more than symbolic.
The magic bullet for Greece would be the writing-off of some portion of the 240 billion euros (£199.7 billion) in loans it has received from the euro zone since 2010. But Athens is adamant it does not want that and the euro zone is not willing to provide it.
Instead, what Greek officials seek is some combination of at least three measures: a further lowering of interest rates on existing loans, an extension of the maturities and pay-back schedule, and some relief on financing EU structural funds.
“We don’t want and we’re not asking for a haircut,» Greek Finance Minister Yannis Stournaras said last week.
“A reduction in the interest rates and a pushing back of the amortisation schedule is more effective from the point of view of the financial markets.”
The critical moment to start discussing what relief can be given to Athens will come in late April, when EU statistics agency Eurostat will issue its assessment of whether Greece has achieved a budget surplus before debt-servicing costs.
Athens said on Tuesday it posted a central government primary budget surplus of 700 million euros last year and expects a larger surplus excluding debt payments in 2014.
In November 2012, euro zone finance ministers agreed that if Greece managed to deliver a primary surplus, they would examine ways of easing the debt burden. Athens expects that to be honoured.
“We are delivering the primary surplus earlier than expected,» Greek Prime Minister Antonis Samaras said last week. «That will set the conditions for some sort of debt relief exercise. We’ve worked hard and delivered. There was a decision in November 2012 and we expect that decision to be respected.”
If Eurostat does deliver a positive report in April, euro zone finance ministers are expected to discuss Greece’s case at a meeting in early May or mid-June.
The goal of any reorganisation would be to help bring the overall debt burden down from 176 percent of GDP to below 110 percent by 2020. But with a debt write-off out of the question, the actual relief is likely to be minor.
If euro zone ministers agree to cut the margin that Athens pays on the 53 billion euros of loans it received from the first of its two bailouts, the reduction is largely cosmetic.
The margin above borrowing costs now stands at 50 basis points. If that were reduced to zero, the savings for Athens would be 265 million euros a year. By 2022, and if applied retroactively, that could add up to around 3 billion euros.
Interest on the rest of euro zone loans made to Greece is already effectively zero, so cannot be reduced any further.
Another option would be to lower the amount that Greece contributes to investment financed by EU structural funds, which are used to develop the poorer regions of Europe, including in Greece.
The state’s co-financing contribution has already been lowered from 10 percent to 5 percent of the value of any project. Even if that 5 percent were reduced to zero, it would still only save Athens around 760 million euros by 2020.
Instead, the biggest contribution would likely come from extending the maturity of loans and smoothing out any repayment humps.
The loans have already been extended to an average of 30 years and Athens has a grace period of 10 years on nearly three-quarters of all its borrowing.
If the maturities of the loans were extended to an average of 50 years – an idea floated by Stournaras last year – the annual cost of debt servicing would fall sharply, leaving more money for growth or debt repayment.
A simple approximation shows if the 240 billion euros is repaid over 30 years, Greece would have to pay back 8 billion euros annually; if over 50 years it would be less than 5 billion a year.
“It does not affect the debt-to-GDP ratio, but it makes debt servicing much easier. That in the end is what matters,» said Gilles Moec, economist at Deutsche Bank.
“What is relevant is how much we think a sovereign diverts from his current spending to pay interest and redemptions. From that point of view, a lengthening of maturities has a massive impact,» he said.
Lower debt servicing costs would also help Greece return to the bond markets, easing the burden on the euro zone and the IMF, who are now the sole long-term lenders to Athens.
Stournaras said last week that Greece may test market appetite with a 5-year issue in the second half of this year.
Ultimately, with a write-off excluded, the Greek debt-to-GDP ratio can only be reduced through economic growth, inflation that erodes the value of debt over time and the sale of state-owned assets.
“We might again have to start talking about investment in Greece – setting up a Marshall Plan,» said Carsten Brzeski, economist at ING, referring to the U.S. economic support to help rebuild Europe after the end of World War II.
The IMF forecasts that Greece will deliver growth of 0.6 percent this year after six years of recession, accelerating to 2.9 percent in 2015. From then on, it assumes Greece will grow by close to 4 percent a year, an ambitious rate.
With growth like that, and if inflation picks up after months of deflation, Greece may stand a chance of getting on top of its debts. If the euro zone can come up with some creative reorganization of its loans that will help too.