Athens wants to turn bailout loans’ floating rates into fixed

Athens wants to turn bailout loans’ floating rates into fixed

The answers to the burning questions of whether a new arrangement for the Greek debt is necessary and what kind of measures will be required are coming through the numbers: Next year the amount Greece will have to repay for the capital of the bailout loans it has received will be almost as much as the interest on them.

In total, the amount due in 2016 for servicing the debt will come to just 7.5 percent of gross domestic product, similar to the following years’ amounts. That is why the eurozone has been insisting on every occasion that the Greek debt does not require a haircut and that any intervention would be necessary only from 2022 onward – i.e. the year when the current grace period ends: That year Greece will need to pay 22 billion euros for interest alone.

Until then the state’s obligations are under control: Market observers say that the intervening years will be very much like 2016. Next year Greece will have to pay 12.5 billion euros, of which 6.5 billion concerns capital repayment and 6 billion the payment of interest.

At this point the interest trap is hiding. Nowadays the country pays interest of some 6 billion while the loans of the European Stability Mechanism have interest that is very low, around 1 percent. However, in the following years the interest rates will begin to grow, given that they are floating rates, placing a significant burden on future state budgets.

For that reason Athens is requesting the conversion of the floating rates into fixed rates, which would be advantageous compared to to the current levels (some 0.5 percent) but still be fairly low for a long period (of at least 15-20 years) during which they would increase by at least 2-3 percent under normal circumstances. All this would mean that the state budget would become lighter in the future as far as the expenditure on interest was concerned, compared to what the country faces without an arrangement.

Similarly the future demands of the ESM will have to undergo a haircut, although this is something that the other eurozone member-states are not inclined to accept. In contrast, what they are willing to discuss is an extension to the grace period and to the repayment time for the eurozone loans.

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