Now European partners are preparing to ease Athens' debt burden
without writing off their loans but by stretching them out into the
distant future, extending maturities from 30 to 50 years and further
cutting some interest rates, EU officials say.
Greece made a successful, if artificially engineered, return to the
long-term capital markets last week for the first time since its
international bailout in 2010, and just two years after imposing
heavy losses on its private creditors.
But with its economy shattered, the country is still a long way from
being able to fund itself unassisted in the market. The
International Monetary Fund says Greece is likely to need further
financial help from the euro zone over the next two years.
One reason why the sale of 3 billion euros in five-year bonds at a
yield of 4.95 percent went so smoothly, on the eve of a support
visit by German Chancellor Angela Merkel, was that investors are
widely anticipating official debt relief.
"That has been quite substantially priced in, and the market is also
expecting Greece to be quickly upgraded by the credit rating
agencies," said Alessandro Giansanti, senior rate strategist at ING
bank in Amsterdam.
"In a second stage, the market is also expecting a reduction in
principal on official debt, and no private sector involvement
(write-down) in the coming years," he said.
Whether such expectations are fully realized will only become clear
later this year, when negotiations start with the euro zone and the
IMF on Greece's longer-term funding, and the end of its wrenching
But EU leaders share an interest in helping conservative Prime
Minister Antonis Samaras' shaky coalition cling to office rather
than seeing leftist anti-bailout firebrand Alexis Tsipras sweep to
power demanding a massive debt write-off.
"EXTEND AND PRETEND"
North European creditor states strongly oppose outright debt
forgiveness, which critics say would unfairly reward past Greek
mismanagement. Parliaments and eurosceptics might rebel or challenge
any write-off in court.
But extending the maturities and cutting the borrowing cost has
already been done once — the loans were originally granted for five
years at a punitive interest rate — and it is less politically
explosive in Germany, the Netherlands and Finland.
It is a government version of the "extend and pretend" behavior of
private lenders who keep bad loans on their books, hoping something
will turn up, rather than writing down losses.
"This kind of restructuring of official sector debt has already
quietly been happening," said Elena Daly, principal at EM Consult, a
Paris-based sovereign debt consultancy.
"Stretching out the official sector loans and reducing their
interest rates opens a window for new private sector lending without
fear of competing with existing official sector creditors when the
time comes for repayment," she said.
A country's debt profile — the timeline of future repayment or
refinancing obligations — is more important to investors than the
absolute size of its debt stock.
Asked what European authorities planned to do about the mountains of
official debt owed by Greece, Ireland and Portugal, a senior EU
policymaker replied with a riddle.
Who was Britain's prime minister, he asked, when it paid off its
World War II lend-lease debt to the United States? The answer is
Tony Blair in 2006, more than 60 years after the war ended. Indeed,
Britain still has some World War I debt to Washington outstanding,
a century after that conflict began.
[to top of second column]
After two EU/IMF bailouts worth a total of 240 billion euros and a
"voluntary" write-down of privately held bonds, Greece has a public
debt equivalent to 175 percent of its national output, far beyond
what the IMF considers sustainable.
Gross domestic product has slumped by 25 percent, wages and pensions
have been cut sharply and unemployment stands at nearly 27 percent,
including more than half of all young people.
With anemic growth just starting to return, there is scant prospect
of reducing the debt to the targets set by the "troika" of
international lenders of 124 percent of gross domestic product in
2020 and 110 percent in 2022.
Interest payments swallow nearly 5 percent of Greece's GDP, twice as
much as in France. Ireland and Portugal, which also received euro
zone bailouts, are also paying between 4.5 and 5 percent of their
national income in debt service.
Italy, which did not take a bailout but has the euro zone's highest
debt ratio after Greece at 132 percent, pays 5.3 percent of GDP in
interest payments — a huge burden.
It would require improbable economic growth rates for many years to
bring those debt numbers down substantially, forcing governments to
run high primary budget surpluses before debt service that crowd out
Trying to revive an economy while meeting that level of debt service
is like accelerating with the hand brake on.
Once the EU statistics office confirms in the coming weeks that
Greece has achieved a primary budget surplus before debt service
costs, the road to official debt relief should be open.
Ironically, last week's dabble in the bond market may make it harder
for Athens to win a debt write-off that would hasten its recovery.
With foreign investors piling into the euro zone as a relative safe
haven compared to emerging markets, the risk premium on weaker
European countries' sovereign debt over benchmark German bonds has
fallen almost to pre-crisis level.
German officials are already saying there is no urgent need for debt
relief. As throughout the euro zone crisis, once the market heat is
off, Berlin is reluctant to act.
EU officials say the Great Stretch may not be extended beyond Greece
to Ireland, which has already returned to market funding, or
Portugal, expected to exit its bailout program next month without
requesting further official assistance.
Yet it would make sense to grant the same terms to them too to speed
their post-crisis recovery and narrow Europe's politically dangerous
(Writing by Paul Taylor; editing by Susan Fenton)
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