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04/12/2016

Eurozone ponders whether Greece needs more debt relief

Euro & Finance

Eurozone ponders whether Greece needs more debt relief

Anti-crisis graffiti. Greece, 2010.

[Robert Gourley/Flickr]

Eurozone states are reconsidering whether Greece needs the additional debt relief it has been seeking, because the country’s economic reforms, and improved prospects, have changed the arithmetic, officials say.

Describing a rethink by some of Greece’s partners, officials told Reuters that no decision would be taken until a new analysis of whether Athens can service its debts has been completed.

“It has not been decided, but it has not been ruled out, either,” one eurozone official said.

A provisional offer of further debt relief was made two years ago, when eurozone states extended maturities and cut interest on its bailout loans.

Ministers agreed then that if Athens met certain conditions and more needed to be done make its debt sustainable, they would consider “further measures and assistance”.

Athens has lobbied for its lenders to lower the interest rates on its loans further and give it more time for repayment. The government hopes to bolster support at home by negotiating an early exit from a bailout that Greeks resent for imposing strict foreign supervision of their economy.

Greek Finance Minister Gikas Hardouvelis told Reuters on Wednesday talks about further debt relief would begin after a final review of Athens’ bailout programme, scheduled for December.

Greek government officials said Athens was not aware of any rethinking by the eurozone, and said the country deserved to be given the relief as promised.

“The agreement over the debt-relief measures was not an emergency solution, but a reward for a country that made it. In this context, and since data shows that we are succeeding, the discussion over a debt relief must continue as agreed,” one official told Reuters.

Athens achieved a primary budget surplus in 2013, a year ahead of schedule and is set to beat its primary surplus target this year as well.

In return for those efforts, the eurozone has considered further cuts in the interest on a first package of bilateral loans to Greece and extending the average maturities of a second package from 32 years to around 50 years.

But officials in Brussels say the changed economic situation of the eurozone and Greece must be taken into account.

Athens now has a smaller relative budget deficit than France, Finland or Italy, and its economic growth prospects, after six years of a deep recession, are much improved. Greece also faces interest payments at around 1.5%, way below anything it could get on the market.

“The reality on the ground has changed significantly from the parameters that formed the basis of the November 2012 pledge,” a second eurozone official said of the group’s offer to ease Greece’s terms.

“With the arrangement now in place, it does not make much sense to say that Greek debt is not sustainable. It is very much sustainable.”

Talks still pending

The euro officials said the issue of debt relief was not central to their negotiations with Athens on how to handle an exit from its bailout programme. Talks on further debt relief would come only after those discussions.

In an interview before a meeting of eurozone ministers in Brussels on Thursday, Hardouvelis told Reuters he expected a deal next month under which Athens would still have some access to eurozone funding with less stringent supervision .

Two years ago, the promise of more debt relief, if needed, was necessary to get the International Monetary Fund on board.

The IMF insisted on that because in November 2012 it seemed that without further action, Greece would struggle to cut its debt from an expected 175 percent of GDP in 2016.

The latest European Commission forecasts show Greek debt will peak at 175.5% this year, dropping to 157.8% in 2016.

“When you look at the debt-sustainability path, which was done when the current programme was structured, the calculations are that now Greece is on its path of debt sustainability and will continue on it without additional measures,” a third euro zone official said.

“There would not be a real reason to grant them any new concessions on length of loans or the interest rate.”

The Greek government might complain that this amounts to punishing it for meeting its part of the bargain. A second Greek official said Athens needed debt relief “not because we can’t live without it, but because we deserve it as a reward for our success.”

Withholding it could play into the hands of opposition party Syriza, which leads in polls with elections possible next year.

>> Read: Syriza leader Alexis Tsipras prepares for power

Syriza is calling for an international conference to write off part of Greece’s official debt. It could seize on a rejection of further debt relief as evidence that Prime Minister Antonis Samaras is getting nothing from Western creditors. 

Background

Greece, with a debt-to-GDP ratio of around 175% of GDP, has been bailed out twice since 2010 by other eurozone governments and the International Monetary Fund (IMF) after being cut off from markets because of unsustainable public finances.

Officials from the IMF, the Commission and the European Central Bank, called the Troika, review every three months Greece's progress in putting its finances in order and reforming its economy in exchange for the loans, which are disbursed in tranches.

Last July Greece wrapped up its leadership of the rotating EU presidency by claiming the six-month stint had proved that it was a "normal country" capable of managing its finances.

>> Read: Greece closes EU presidency, says country back to 'normal'