Eurozone finance ministers are poised to give Greece debt relief — a big step towards preparing the country’s exit from more than eight years of international bailouts.
National officials said an agreement was close that would leave Greece with minimal repayments until after 2030 on the €228bn it owes to the rest of the eurozone. The plan is set to be concluded by ministers in Luxembourg on Thursday to help to convince investors that Greece is ready to return to markets when its bailout programme expires in August.
A deal would end years of disagreements among creditors, and specifically between Germany and the IMF, over how far to ease the burden on Greece, whose debts equal 178 per cent of its economic output.
Pierre Moscovici, the EU’s economy commissioner, said on Wednesday he was “confident” of a deal that would “meaningfully lighten Greece’s debt burden” and “send a positive signal both to markets and to public opinion”.
Diplomats have said any accord has to strike a difficult balance. Investors need to see that Greece’s debt path is credible — but offering too much to Athens will inflame public opinion in Germany and other fiscally hawkish eurozone member states.
Any deal would be part of a broader package of measures intended to ensure a smooth exit for Greece from its third bailout programme, which was agreed in 2015 with a budget of €86bn. Much of Greece’s debt load, however, comes from two prior rescue packages provided by the eurozone and IMF.
Given that a simple cut in the amount that Greece owes is not under discussion, easing its repayment burden by extending maturities is the central question going into Thursday’s discussions. It is also one where positions are “converging very rapidly”, according to a senior eurozone official.
At stake is the treatment of close to €100bn of Greece’s older bailout loans — postponing the start of significant repayments from 2023 until a more distant date.
The IMF and many governments have advocated an extension of around nine to 10 years to the debt, provided by the eurozone’s previous bailout fund, the European Financial Stability Facility. Germany has been much more reticent, but Berlin has signalled in recent days that it is willing to move, with a 10-year extension now seen by EU officials as politically feasible.
The role of the IMF
The IMF was a financial partner in the euro area’s first two bailout programmes for Greece, arranged in 2010 and 2012, but has never provided money for the third programme.
Nevertheless the eurozone is still desperate to win endorsement from the fund that Greece’s debts are on a sustainable path. The expectation is that the IMF in the coming days will carry out an assessment of the Greek economy, known as an Article IV report, which will give it an opportunity to state its view.
In the meantime, a question in Thursday’s talks will be what to do about the €10bn that Greece owes the IMF from prior bailouts. The loans are relatively expensive for Athens, because they carry a higher interest rate than the money it owes to the euro area. Some governments have proposed using European bailout money to pay off some or all of the €10bn.
Germany, however, has strongly opposed this — a stance linked to its determination that the IMF keep some “skin in the game” in Greece.
Greece’s cash buffer
This issue is technically outside the debt relief talks but in practice is closely linked.
The exit strategy for Greece — as for all countries leaving eurozone bailout programmes — includes making sure the country has access to enough cash to potentially support itself for about 12-18 months without needing to raise funds on capital markets.
This is a consideration when it comes to deciding what Greece’s final payment from the €86bn bailout pot should be.
The provisional plan is for a €11.7bn bailout tranche, which would give Greece an overall buffer of around €20bn. But Athens is keen on a larger amount.
Greece’s general need for a financial cushion is not the only consideration: the size of the payment is linked to whether the eurozone wants to give Athens the money to pay off the IMF. Another idea on the table is to beef up the size of the payment so Athens can buy back some debt held by eurozone central banks.
The Growth Adjustment Mechanism
Once seen as a potential silver bullet in the debt negotiations, it is looking increasingly likely that this idea — to link the timetable of Greece’s debt repayments to its future economic growth — will be left off the table.
The IMF has made clear it would only find the GAM relevant if applied automatically — in other words, if a slowdown in the Greek economy led without question to lighter debt repayments.
Germany, on the other hand, wants a role for the Bundestag in approving changes to debt repayment deadlines. For the IMF, that would make the instrument unpredictable and therefore meaningless.
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