June 7, 2015 / 3:51 PM / 2 years ago

Greek bid for debt relief faces euro zone skepticism

Greek Finance Minister Yanis Varoufakis walks next to a European Union and a Greek national flag during a parliamentary session in Athens April 2, 2015.Alkis Konstantinidis

BRUSSELS (Reuters) - Greece wants to restructure its huge public debt through cheaper refinancing, longer maturities, a write off of some principal and turning some debt into perpetual or GDP-linked bonds, but the plans have no support in the euro zone so far.

The Greek government spelt out ideas on how to restructure the debt, which is at 175 percent of gross domestic product, in two documents submitted to its creditors last week.

A restructuring has been one of the key demands from Greece in its negotiations with creditors on new financing, but until now Athens has never quite explained what it meant.

The euro zone, which holds most of the debt, does not even want to start discussing any form of debt relief before Greece implements reforms promised in exchange for the money it has already received, on which talks are deadlocked.

"Greece has to focus on the completion of the program -- that's a mutual priority, debt restructuring is not on table," Slovak Finance Minister Peter Kazimir said on Twitter.

The euro zone has explicitly ruled out any write-off of principal, though governments are considering a further extension of maturities on existing loans.

The Greek approach is ambiguous, not least because the two documents present different schemes, one more ambitious than the other.

A seven-page paper called "Ending the Greek crisis", leaked to the Financial Times, goes beyond a 47-page document entitled "Agreement on the economic policy, the reforms of the period 2015-2020", published by Germany's Der Tagesspiegel last week.

In the longer document, Athens does not ask for any existing loans to be written off, or even have their maturities extended.

Instead, it aims to use cheaper loans from the euro zone's ESM bailout fund to buy back 27 billion euros of its most expensive bonds held by the European Central Bank -- effectively rolling-over the debt on more favorable terms.

The second element entails early repayment of half of the 20 billion euros that Greece owes the International Monetary Fund by end March 2016. The logic is the same -- the IMF loans are much more expensive than money from the euro zone bailout fund.

Athens believes that combined with agreed fiscal policy measures, such measures would allow Greece to return to market financing from the end of March 2016 or sooner and hence make Greece eligible to benefit from the ECB's bond buying plan.

Write-Off

The shorter document spells out a more ambitious plan. In addition to the schemes that would refinance the ECB and IMF held debt, it proposes to turn 53 billion euros in bilateral loans granted to Greece under the first bailout into perpetual bonds with a 2-2.5 percent annual interest rate.

If a perpetual bond is politically unacceptable, since it assumes the principal is never paid back, the maturity of the 53 billion could be extended to 100 years with "minimal" principal to be paid back on maturity.

Another option would be to turn those loans, which now carry an interest of 6-month EURIBOR plus 0.5 percent, into bonds whose interest is linked to Greek GDP growth with debt repayments automatically suspended if growth is too low.

In the most controversial proposal, the paper calls for a phased write-off of half the loans granted to Greece by the euro zone bailout fund EFSF, which now total 131 billion euros but could reach almost 144 billion on full disbursement.

The maturities of the remaining loans could be lengthened to an average of 50 years from the current 31 years.

The creditors' response has been cool, stressing that debt issues can only be discussed when Greece completes implementing the reforms it promised.

"Debt restructuring will be discussed at some point, in line with the 2012 Eurogroup statement. But there is not much understanding among euro zone countries for restructuring," one senior EU official said.

"The EU loans to Greece are so cheap, long and with a long grace period, that the need for restructuring is hardly there."

The official said the favorable terms, including a 10-year interest repayment moratorium on he EFSF loans, were equal to a transfer of at least 8-9 billion euros per year from other euro area countries to Greece.

"That is equal to 5 percent of Greek GDP. On top of that, the EU budget offers structural, cohesion and agricultural funds equal to almost 3 percent of Greek GDP per year, in direct transfers. It is rather generous," the official said.

Editing by Alastair Macdonald and Paul Taylor

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