Euro zone mulls new ways to cut Greek debt mountain

TOKYO Sun Oct 14, 2012 1:18am 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)
european union allowed Greece to enter the eurozone.The european auditors were not able to find the greek fraud (if there was any).
now the same people realised that they are not good enough also to give a solution to the problem which seems to go bigger and bigger with this childish and revenging financial plan.
so the conclusion is that:

nobody is going to take his money back unless growth return to greece.
the figures and facts:coca cola left greece (not the production part) and so did FAGE.the taxes will be paid to uk and luxemburg respectively.
if the greek gonverment needs my help i am ready. i speak native greek i know all the financial situation of souteastern europe and i can assure them that i know more that these “faulty” economists.
my company can boost the greek economy and accelarate the growth 10 times more than troika.

Oct 14, 2012 3:05am EDT  --  Report as abuse
Observito wrote:
Oh who cares anymore, bunch of shiftless fools, let them go to hell, go to heaven or go home and have a nap. They are useless tools.

Oct 14, 2012 11:16am EDT  --  Report as abuse
dareconomics wrote:
There is one simple way to assist Greece in attaining a “sustainable” 120% debt to GDP ratio by 2020. The Eurozone has about €67bn worth of Greek debt on its books from ECB purchases and the March bailout. It could simply forgive the debt and give Greece a major boost. Or, it could continue proposing more shenanigans. Guess which one option it is floating around the mainstream media?

Whenever the troika discusses plans to help Greece, these always involve the country taking on more loans. Nothing has changed. If Greece cannot pay today, rolling over today’s loans a few years into the future means that they won’t pay tomorrow.

The first scheme proposed in this article is laughable. The idea is to loan Greece money so that it can buy back its discounted loans from the market. This plan shows a basic lack of understanding of markets.

Greek bonds are trading at multi-year high right now. This is because investors are anticipating some sort of bond buying plan and are rushing into the market to front-run the trade. Just the act of discussing these plans have made them moot. Greece will not be able to save money buying back its own bonds because the prices have been bid up.

Another idea mentioned in the article is to allow the Greek bank recapitalization loans to be swapped for equity in the banks. This is actually not a bad idea. The problem with it is that swapping €48bn in debt for equity in worthless Greek banks may not be politically feasible before German elections. Any giveaways will have to be signed off by Germany.

The Greeks will supposedly receive €45bn in privatization proceeds from the sale of state assets. So far, they have received nothing from state sales, and I do not see a line of investors willing to hand over their cash for dubious assets in a country with a weak economy and weak property rights. Keep in mind that Greece is just an election away from a default and tearing up all the deals it has made since 2009.

The article points out the tried and tested way that Greece will meet a sustainable debt ration by 2020. They’ll just lie:

“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”.

More likely it will be zero, because Greece will have defaulted by then, but not until a few more years of misery.

Oct 15, 2012 5:23pm EDT  --  Report as abuse
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