Euro zone mulls new ways to cut Greek debt mountain

TOKYO Sat Oct 13, 2012 3:24pm EDT

European Central Bank (ECB) Executive Board member Joerg Asmussen smiles during an interview with Reuters in Berlin June 19, 2012. REUTERS/Pawel Kopczynski

European Central Bank (ECB) Executive Board member Joerg Asmussen smiles during an interview with Reuters in Berlin June 19, 2012.

Credit: Reuters/Pawel Kopczynski

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TOKYO (Reuters) - Euro zone officials are considering new ways to reduce Greece's huge debts because delays to reforms by Athens and continued recession have put the target of a debt to GDP ratio of 120 percent 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 would stop contracting next year.

But Greece now expects its economy to shrink by 3.8 percent in 2013, its sixth consecutive year of contraction, boosting 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 organize voluntary buy-backs of its bonds, he said.

The country is currently locked in talks with its lenders on a further set of cuts and reforms in order to obtain a new loan tranche. A deal should be reached by the time EU leaders meet on October 18-19, Greek Prime Minister Antonis Samaras said in an interview with the Sunday edition of daily Kathimerini.

Money for buy-backs 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, the official said.

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 recapitalized by the ESM, we could convert some of the euro zone loans for bank recapitalization 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 to recapitalize 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.

Greek government spokesman Simos Kedikoglou said several options were on the table. "The ECB, which holds Greek government bonds, could satisfy itself with lower interest rates on those bonds," he told the Sunday edition of the Greek Realnews newspaper.

"Or, it could agree to roll them over when these bonds mature. Also, the recapitalization of Greek banks could take place directly through the ESM as is currently being considered for Spain."

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.

The second euro zone official said Athens could use proceeds from the privatization of state-owned assets to retire debt.

"The privatization process is finally kicking in, the structure is ready," the official said. "You could expect a few billion euros from privatization to buy back debt. This could happen relatively quickly."

The debt sustainability analysis from March estimated Greek privatization 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 program and 14.4 billion already disbursed under a second bailout.

The euro zone could also further lower interest on the loans for the first program, 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 little appetite among euro zone countries for a restructuring of official sector loans to Greece.

A senior Greek government official said the euro zone might deem Greece's debt sustainable even if it is seen exceeding the 120-percent-of GDP target in 2020.

"The important thing is for the debt to be on a downward trajectory," the finance ministry official told reporters in Athens on condition of anonymity. "The 120-percent number is not cast in stone, there's nothing magical about it -- it won't be the end of the world if in the end, the number is 116, 118 or 125 percent".

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 would cost 13 billion to 15 billion euros and officials said the euro zone realizes it will need to come up with the money.

But no decision on the financing has been reached yet.

(Reporting by Jan Strupczewski and Harry Papachristou and Lefteris Papadimas in Athens; Editing by Tim Ahmann and Jason Webb)

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Comments (3)
VonHell wrote:
So… the err “solution” is to find a way to reduce the debt at the same time the greek gov keeps spending more than its income and increasing the debt? lol and people still wonder why they are in crisis…

There are only two options:
1-The lenders and the euro members take the losses… the banks simply acept something like 50% debt cut again. Because before 2020 the greek debt will be at more than 200% again… simply keeping re investing the already “invested” money in this snowball that would be extremely profitable… except by the fact the greeks would never pay back… just a child’s game where you pretend that the investment isnt already lost… and ESM or ECB would just fill the gap, because ofc, both solutions require continuous “bailouts” to compensate the greek deficit…

2-Other eurozone members all the losses… That is what will happen… after several trades and exchanges… the greek debt will gradually be transfered from banks and investors at a profit and end up in the hands of ECB and ESM…

So… after finding a new bunch of idiots to keep re investing money and providing a continuous source of money, greek politicians as usual wont see any reason for any reform… and will just keep sucking the idiots at the same time Greece will keep sinking…

But no worry… Greece problem is just about 330Bi euros plus greek deficit… you could just dump Greece and all would be solved…
But then you have Spain equal about 8xGreece… and Italy that is still hiding the size of the bomb…

Oct 13, 2012 7:03pm EDT  --  Report as abuse
MuchIgnorance wrote:

I am so glad that you are able to rationalize the situation. Except you didn’t; you failed to even comprehend the information in the article so let me try to help you. When they say the % of GDP dept-ratio will increase they don’t mean that the actual amount will increase they mean that the income of the country is decreasing (6th year in a row) which means the ratio of debt to income has increased.

As to your comment about reform… Reform has already occurred a major part of which was massive cuts and jobs being eliminated, The problem is that for reform to be effective you need consumer confidence, investor confidence, and cash flow.

If people don’t have money to spend, think it is unwise to spend and hoard what little they can, or if investors consider investing in the country too risky then reform or any “solution” will not work.

Currently the economy in Greece is contracting due to the reform you and the EU wanted.

Oh and have you checked out how much the US owes? and the fact that it has been increasing (actual amount owed).

So before you attempt to appear wise and present clear-cut solutions, kindly try to understand the info provided you.

Oct 13, 2012 9:31pm EDT  --  Report as abuse
The situation in Greece cannot be solved without euro exit and default. They rely too much on tourism and beaches and islands. What goods are produced in Greece except feta cheese, ouzo and tzatziki? The second problem is that their government is just a puppet and it’s corrupt. Politicians are stealing money today and tomorrow they cry at ECB to loan them. Third problem is Greek lifestyle. They had huge pensions and salaries compared to the rest of Europe. They were earning almost double than germans… and Germany is exporting everywhere.
Fourth problem is that Greek people are emigrating. This means less taxes for the gov, less consumption and in the end = less money.

So regardless of the time limits, ratios and other mambo jambo, if Greece keeps borrowing it’s just harming it’s people. The country is still in recession and it will be for at least another 3 years. By that time GDP to debt ratio will exceede 200..250% (optimistic target).

P.s. A grexit will happen only when the lenders say so. So until then the puppet gov will continue to borrow because it’s profitable for the lenders. If 17 euro states cannot solve the problem of Greece it doesn’t mean they can’t… they don’t want.

In the end Greece will be forced to sell islands to pay it’s debt. This is what ECB wants and this will happen. That unless the people start a revolution.

Oct 15, 2012 5:04am EDT  --  Report as abuse
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