Analysis: Euro zone debt forgiveness lies ahead in Greek mire

BRUSSELS Tue Nov 27, 2012 2:35pm EST

From L-R: International Monetary Fund (IMF) Managing Director Christine Lagarde, Luxembourg's Prime Minister and Eurogroup chairman Jean-Claude Juncker and European Economic and Monetary Affairs Commissioner Olli Rehn address a joint news conference after a euro zone finance ministers meeting in Brussels November 27, 2012. REUTERS/Jock Fistick/Pool

From L-R: International Monetary Fund (IMF) Managing Director Christine Lagarde, Luxembourg's Prime Minister and Eurogroup chairman Jean-Claude Juncker and European Economic and Monetary Affairs Commissioner Olli Rehn address a joint news conference after a euro zone finance ministers meeting in Brussels November 27, 2012.

Credit: Reuters/Jock Fistick/Pool

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BRUSSELS (Reuters) - Within minutes of euro zone finance ministers reaching a deal to cut Greece's debt late on Monday, commentators on Twitter were dismissing it as another exercise in "kicking the can down the road".

To an extent that is true. Under the agreement, the euro zone and the International Monetary Fund will give Greece two more years to reach its budget goals and will find another 44 billion euros ($57 billion) to keep the country afloat in the meantime.

But while a degree of can-kicking may be going on, there was a critical element in Monday night's deal that goes a lot further than any other step taken so far in the debt crisis to get Greece back on its feet.

Implicit was an understanding that Greece will undergo some form of official-sector debt restructuring - with euro zone countries forgiving a portion of Greece's debt - at some point in the future, the sort of last-ditch measure usually reserved for impoverished states in Africa and Latin America.

At a news conference in the early hours of Tuesday, German Finance Minister Wolfgang Schaeuble came closer than he has ever done before to publicly acknowledging that creditors face such an eventuality - a move that will be very hard for the likes of Germany, Finland, Austria and the Netherlands to take.

"When Greece has achieved, or is set to achieve, a primary surplus and fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt," he said, looking weary after 13 hours of negotiations.

The timing and reference to a primary surplus are important.

The Greek economy is forecast to return to growth during 2014 and to achieve a primary budget surplus - the balance before deducting the cost of debt financing - of 4.5 percent of gross domestic product (GDP) in 2016.

By the end of that year, the EU-IMF assistance program should be over and Greece will in theory be on its own, financing itself in the financial markets in the normal way.

Monday night's deal took care of the extra financing Greece will need between 2014 and 2016 and set out a series of steps the euro zone and Greece will take to get its debt level down from around 190 percent of GDP next year to 124 percent by 2020.

But what it didn't set out in precise detail is how Greek debt will go on falling, from 124 percent of GDP in 2020 to 110 percent in 2022 and 88 percent in 2030, as agreed during the talks.

And it didn't say how Greece is expected to win back market confidence in 2016 even though its debt level that year is still expected to be 175 percent of GDP.

The answer is a combination of lower interest rates and longer maturities being applied to loans to Greece, Athens paying down more of its own debt thanks to growth and the potential for euro zone states to write down their loans.

"Euro area member states will consider further measures and assistance, including lower co-financing in structural funds and/or a further rate reduction in the Greek loan facility if necessary," said Olli Rehn, the commissioner for economic and monetary affairs, again hinting at the possibility of a more fundamental overhaul of debt at some future point.

A European Union official closely involved in the discussions on Greece said there was a general unwillingness among euro zone countries to acknowledge that they may have to forgive some of the 127 billion euros they have so far lent to Greece, even if all of them know the issue can't be avoided forever.

In order to make Greece's debt sustainable in the long term, the IMF has determined that it must be cut to around 120 percent by 2020 and 110 percent by 2022. But there is no guarantee those levels will be sustainable on those dates.

As a result, the prospect of a debt writedown has to remain, especially as the euro zone countries, who will soon be responsible for around three quarters of all Greek debt, have said time and again that they will do what is necessary to keep Greece afloat and in the euro zone.

The EU official said the best option would be for euro zone countries to bite the bullet and write down 40-50 billion euros of loans to Greece in 2016 or shortly afterwards, so that its debt-to-GDP ratio is aggressively reduced and the country can more easily return to financial markets.

But that is unlikely to happen, since no member state wants to write down any Greek debt, the cost of which would be born by taxpayers. Each state will do everything possible to ensure that any writedown, if it must happen, is as small as possible.

"If you were really going to help Greece, you'd write off enough debt to get the ratio down to 60 percent of GDP, which is a decently sustainable level," the official said. "But that's never going to happen. No one's going to buy that."

Instead, the possibility of debt forgiveness will hang over the euro zone for the next four years and will, whether countries like it or not, have to be tackled at some point.

($1 = 0.7733 euros)

(Writing by Luke Baker; Editing by Ruth Pitchford)

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Comments (3)
breezinthru wrote:
Excerpt from the article: “At a news conference in the early hours of Tuesday, German Finance Minister Wolfgang Schaeuble came closer than he has ever done before to publicly acknowledging that creditors face such an eventuality – a move that will be very hard for the likes of Germany, Finland, Austria and the Netherlands to take.”

This is surely true, but I think it will be even harder for debtor countries like Ireland to take. They will surely be thinking, why does Greece get a haircut on their debt while we are expected to pay back every last Euro?

Nov 27, 2012 7:23pm EST  --  Report as abuse
scythe wrote:
(quote) The Greek economy is forecast to return to growth during 2014 and to achieve a primary budget surplus – the balance before deducting the cost of debt financing – of 4.5 percent of gross domestic product (GDP) in 2016.

That is the main story

Samaras asked the eurozone for some slack to kick start the Greek economy into growth. This is his target, from which the debt scenario is dealt with.

The eurozone got the loan bunker it wanted, so that loans couldn’t be siphoned by those Greek politicians who were still prone to the fakelaki mentality. Plus the loans are made in installments, based on whether Mr. Samaras achieves his economic targets.

the anonymous euro official is off track with the loan write down
premature and only a sideshow

if the Greek government and its politicians fail abysmally, then a default would be more likely, as the eurozone would have insulated itself from the residual risks by then

Nov 28, 2012 5:13am EST  --  Report as abuse
dedavidov wrote:
Greece’s fate is already clear. By following austerity policies that have proven destructive in other countries already, debt will never “naturally” decline compared to GDP.
If someone was to take a look at the debt reports of Greece via the Greek finance ministry, one would see that Greece cannot under this circumstances return to having a surplus. From an extensive analysis I have recently read, I have easily realized what might happen to Greece and to Europe as a whole. When Greece’s debt in 2009 was at 120% approx. and now 2012 is at 170%+, do numbers lie? Will i rather choose listening to what “paid” critics have to say or make up my own mind?

Nov 28, 2012 6:26am EST  --  Report as abuse
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