Tuesday 27 September 2016

Greece crisis: European Commission says reprofiling of debt possible but no write-off

Key vote on bailout terms in Greek parliament later today

Alastair Macdonald

Published 15/07/2015 | 06:43

Greek Finance Minister Euclid Tsakalotos reacts during a parliamentary session in Athens, Greece July 15, 2015. A lot of the measures in a deal struck with Greece's lenders will have a recessionary effect but removing the prospect of a
Greek Finance Minister Euclid Tsakalotos reacts during a parliamentary session in Athens, Greece July 15, 2015. A lot of the measures in a deal struck with Greece's lenders will have a recessionary effect but removing the prospect of a "Grexit" will help offset their impact and bring in investments, Tsakalotos said on Wednesday. REUTERS/Yiannis Kourtoglou
Demonstrators gather near the Greek Parliament during a rally against the government's agreement with its creditors in Athens, in central Athens, Tuesday, July 14, 2015. The eurozone's top official says it's not easy to find a way to get Greece a short-term cash infusion that will help it meet upcoming debt repayments. (AP Photo/Emilio Morenatti)
Britain's Chancellor of the Exchequer George Osborne, second right, speaks with Luxembourg's Finance Minister Pierre Gramegna , right, and other ministers during a meeting of EU finance ministers at the EU Council building in Brussels on Tuesday, July 14, 2015. British Treasury chief George Osborne arrived to a EU meeting of finance minister with a clear message, don't expect Britain, which is not part of the euro, to pay for any of Greece's rescue money. (AP Photo/Virginia Mayo)
People queue for free food in the Greek capital
Foreign media broadcast from the balconies of a hotel on main Constitution (Syntagma) square in Athens, Greece July 13, 2015. Euro zone leaders made Greece surrender much of its sovereignty to outside supervision on Monday in return for agreeing to talks on an 86 billion euros bailout to keep the near-bankrupt country in the single currency. REUTERS/Yannis Behrakis TPX IMAGES OF THE DAY
People walk past wallets designed as Euro banknotes displayed outside a kiosk in central Athens, Tuesday, July 14, 2015. The eurozone's top official says it's not easy to find a way to get Greece a short-term cash infusion that will help it meet upcoming debt repayments. (AP Photo/Petros Giannakouris)
A man walks by a mural in Athens, Greece July 14, 2015, Prime Minister Alexis Tsipras faces a showdown with rebels in his own party furious at his capitulation to German demands for one of the most sweeping austerity packages ever demanded of a euro zone government. REUTERS/Yannis Behrakis TPX IMAGES OF THE DAY
Migrants from Syria rest after crossing illegaly from Serbia to Hungary, near Morahalom, Hungary July 14, 2015. Hungary started building a fence along its border with Serbia to try to stop illegal migrants entering from the south, a barrier which German Chancellor Angela Merkel has said makes "no sense". Tens of thousands of migrants, mainly from the Middle East and Africa, use the Balkans route to get into the European Union, passing from Greece to Macedonia and Serbia and then to the EU's visa-free Schengen zone that starts in Hungary. REUTERS/Laszlo Balogh
A pensioner wearing an oxygen line tries to enter a crowded National Bank branch to get her pension in Thessaloniki
Greek Finance Minister Euclid Tsakalotos attends a parliamentary session in Athens
Greek Finance Minister Euclid Tsakalotos arrives for a ruling Syriza party political committee meeting at the party's headquarters in Athens, Greece July 14, 2015. Greece's parliament will pass legislation required for a new financial aid package from Europe's rescue fund despite dissenting views from some ruling party deputies, the country's interior minister said on Tuesday. REUTERS/Alkis Konstantinidis TPX IMAGES OF THE DAY TPX IMAGES OF THE DAY
A woman leaves a polling booth to cast her ballot during a referendum vote in Athens, Greece, July 5, 2015. REUTERS/Marko Djurica
A bather leaps from a rock into the sea on the coast south west of Athens, Greece, on Monday, June 15, 2015. The tourism industry contributes 17 percent to an ever-contracting economy. Photographer: Yorgos Karahalis/Bloomberg
Performers dressed as ancient Greek warriors stand in front of the parliament building in Athens. Photo: REUTERS/Marko Djurica
Greece's Finance Minister Yanis Varoufakis arrives for a cabinet meeting at the Prime Minister's office in Athens
A pensioner is helped by a bank manager after collapsing while waiting along with dozens of other pensioners outside a National Bank in Athens, Greece, July 2, 2015. REUTERS/Yannis Behrakis
As Greece endured another day of crisis and uncertainty, Mr Kenny insisted that Ireland is a country that will not return to the boom and bust-type model of the past
German Chancellor Angela Merkel (L) talks with French President Francois Hollande after their bilateral meeting during a Eurozone emergency summit on Greece in Brussels, Belgium, June 22, 2015. REUTERS/John Thys/Pool
Protesters gather in front of the Greek parliament in Athens last night, carrying banners calling for a No vote in the forthcoming referendum on bailout conditions set by the country’s creditors
Syrian refugees walk through a field near the village of Idomeni at the Greek-Macedonian border, July 14, 2015. The United Nations refugee agency said that Greece urgently needed help to cope with 1,000 migrants arriving each day and called on the European Union (EU) to step in before the humanitarian situation deteriorates further. More than 77,000 people have arrived by sea to Greece so far this year, more than 60 percent of them Syrians, with others fleeing Afghanistan, Iraq, Eritrea and Somalia, it said. REUTERS/Alexandros Avramidis
Outgoing Greek Finance minister Yanis Varoufakis leaves on his motorcycle with his wife Danai after his resignation at the ministry of Finance in downtown Athens this week
Greek Finance Minister Euclid Tsakalotos and International Monetary Fund (IMF) Managing Director Christine Lagarde (back C) attend an euro zone finance ministers meeting in Brussels earlier this week. Photo: REUTERS/Francois Lenoir

The European Commission published the assessment it made last week of Greece's request for a bailout, spelling out a different view of Athens' debt sustainability from that taken by the IMF but also signalling a possibility of debt relief.

  • Go To

A day after the IMF published its latest assessment, saying that Greece would require extensive debt relief from its mostly euro zone sovereign creditors, the EU executive's note, published on Wednesday, said the Greek debt-to-GDP ratio would be 165 percent in 2020 and 150 percent in 2022 if Greece took action to cut it, but could reach 187 percent and 176 percent.

In this photo released by Greek Prime Minister's office on Tuesday, July 14, 2015, Greece's Prime Minister Alexis Tsirpas, right, speaks at journalists Panos Haritos and Antonis Alafogiorgos during an interview to ERT state TV from his office Photo: Andrea Bonetti/Greek Prime Minister's Office via AP
In this photo released by Greek Prime Minister's office on Tuesday, July 14, 2015, Greece's Prime Minister Alexis Tsirpas, right, speaks at journalists Panos Haritos and Antonis Alafogiorgos during an interview to ERT state TV from his office Photo: Andrea Bonetti/Greek Prime Minister's Office via AP

The IMF, which contributed to the Commission assessment, said the debt-to-GDP ratio in 2022 was projected at 170 percent and called for much greater debt relief than has been proposed.

The Commission's assessment said reprofiling, but no write-offs, of debt was possible, but only if Greece implemented reform measures demanded by its creditors.

Read more: Greece crisis: Glossary of eurozone crisis jargon

"The concerns could be addressed through a far-reaching and credible reform programme, very strong ownership of the Greek authorities for such a programme and, after full restoration of the loans agreements, debt-mitigating measures that would be granted only once the commitments to reform from the Greek authorities has been demonstrated.

"A very substantial re-profiling, such as a long extension of maturities of existing and new loans, interest deferral, and financing at AAA rates would allow to cater for these concerns from a gross financing requirements perspective, though they would still leave Greece with very high debt-to-GDP levels for an extended period.""The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date,” said the IMF in a confidential report.

Brussels has also proposed a €7bn loan in bridge financing to keep Greece afloat in July, when it must repay crucial loans to the European Central Bank. The plan could prove controversial as it would use the European Financial Stability Mechanism (EFSM), an EU-wide fund, roping in countries like Britain who balk at their taxpayers contributing to a rescue.

Washington has stepped up pressure on both sides to secure a deal with NATO member Greece. U.S. Treasury Secretary Jack Lew is making a short-notice trip to Frankfurt, Berlin and Paris this week to press for a quick agreement.

Pointing to Washington's importance in the talks, Deputy Prime Minister Yannis Dragasakis said the deal Tsipras struck with creditors might never have happened without U.S. pressure.

Demonstrators gather near the Greek Parliament during a rally against the government's agreement with its creditors in Athens, in central Athens. Photo: AP Photo/Emilio Morenatti
Demonstrators gather near the Greek Parliament during a rally against the government's agreement with its creditors in Athens, in central Athens. Photo: AP Photo/Emilio Morenatti

Although the bailout package is much tougher than the Greek people could have imagined when they resoundingly rejected a previous offer from the creditors in a referendum on July 5, most want to keep the euro.

With banks shut and the threat of a calamitous exit from the currency bloc hovering over the country if it cannot conclude a deal, many Greeks see the package as the lesser of two evils.

Failure to get the proposals - including VAT increases and pension curbs - through parliament could see Greece go bust within days and potentially exit the currency union.

Yields on peripheral bonds dipped, while European stocks and the euro held their breath on Wednesday as fractious parties in the Greek parliament prepared to vote on EU-prescribed austerity measures needed to unlock a third bailout.

The Greek Finance Ministry said it had submitted the legislation required by a deal Prime Minister Alexis Tsipras reached with euro zone partners on Monday to parliament for a vote on Wednesday.

Deputy Finance Minister Nadia Valavani, one of Greece's two deputy finance ministers resigned today from the left-wing government ahead of the vote.

The findings in the report are explosive.

The document amounts to a warning that the IMF will not take part in any EMU-led rescue package for Greece unless Germany and the EMU creditor powers finally agree to sweeping debt relief.

This vastly complicates the rescue deal agreed by eurozone leaders in marathon talks over the weekend since Germany insists that the bail-out cannot go ahead unless the IMF is involved.

Read more: We best get working on a Plan B as the next recession will kill the euro

The creditors were aware of the IMF’s report as early as Sunday, yet choose to sweep it under rug. Extracts were leaked to Reuters on Tuesday, forcing the matter into the open.

The IMF said the Europeans will either have to offer a “deep upfront haircut” or slash the debt burden by stretching maturities and presumably by lowering interest costs.

“There would have to be a very dramatic extension with grace periods of, say, 30 years on the entire stock of European debt,” it said.

Read more: I signed deal I don't believe in, claims angry Tsipras

Debt forgiveness alone would not be enough. There would also have to be “new assistance”, and perhaps “explicit annual transfers to the Greek budget”.

This is the worst nightmare of the northern creditor states. The term "Transfer Union" has been dirty in the German political debate ever since the debt crisis erupted in 2010.

Prime Minister Tsipras battled to win lawmakers' approval on Wednesday for a bailout deal to keep Greece in the euro and avoid bankruptcy, as the IMF pressured Greece's creditors to provide massive debt relief for its crippled economy.

Having reluctantly agreed terms for negotiations on a third bailout from international lenders, Tsipras must face down a rebellion in his anti-austerity Syriza party to push sweeping pro-market reforms and spending cuts through parliament.

Dozens of MPs, including senior Syriza figures and the government's junior coalition partner, could reject or partially reject the bailout, forcing Tsipras to rely on pro-European opposition lawmakers to carry the vote, which is expected after midnight. A snap election could follow if the prime minister's majority collapses.

Adding to the uncertainty, a newly released study by the International Monetary Fund called for much more debt relief than European countries, particularly Germany, have been prepared to countenance so far.

Tsipras has described the deal as a "one-way street" imposed on Greece and the rest of his government shared his scepticism.

"It's a difficult deal, a deal for which only time will show if it is economically viable," Finance Minister Euclid Tsakalotos told lawmakers ahead of a crucial vote on the package later on Wednesday.

That may cause a dilemma in Germany, which has poured more money than any other country into rescuing Greece and where, after months of bad-tempered negotiations with Athens, there is increasingly vocal opposition to yet another bailout.

Berlin may wince at providing huge debt relief to a country it scarcely trusts to honour its promises, but insists on having the IMF in the negotiations to help keep Greece in line.

Washington has also stepped up pressure on both sides to secure a deal with NATO member Greece. U.S. Treasury Secretary Jack Lew is making a short-notice trip to Frankfurt, Berlin and Paris this week to press for a quick agreement.

Pointing to Washington's importance in the talks, Deputy Prime Minister Yannis Dragasakis said the deal Tsipras struck with creditors might never have happened without U.S. pressure.

Although the bailout package is much tougher than the Greek people could have imagined when they resoundingly rejected a previous offer from the creditors in a referendum on July 5, most want to keep the euro.

"It has become even more clear that the government reached a deal under conditions of unbelievable pressure, blackmailed but also having realized that it had no choice to avert a new humanitarian crisis, a new humanitarian tragedy," Labour Minister Panos Skourletis said.

"Bearing these circumstances in mind, we come to parliament today and we ask for the bill to be voted for... and we are trying to temper the harsh consequences of this deal."

Online Editors

Read More

Promoted articles

Editors Choice

Also in Business