27 November 2012

Reuters: Eurozone debt forgiveness lies ahead in Greek mire

Under the agreement, the eurozone and the International Monetary Fund will give Greece two more years to reach its budget goals and will find another €44 billion to keep the country afloat in the meantime.

Implicit was an understanding that Greece will undergo some form of official-sector debt restructuring - with eurozone countries forgiving a portion of Greece's debt - at some point in the future, the sort of last-ditch measure usually reserved for impoverished states in Africa and Latin America.

German Finance Minister Wolfgang Schäuble came closer than he has ever done before to acknowledging publicly that creditors face such an eventuality - a move that will be very hard for the likes of Germany, Finland, Austria and the Netherlands to take. "When Greece has achieved, or is set to achieve, a primary surplus and fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt", he said, looking weary after 13 hours of negotiations.

Monday night's deal took care of the extra financing Greece will need between 2014 and 2016 and set out a series of steps the eurozone and Greece will take to get its debt level down from around 190 percent of GDP next year to 124 per cent by 2020. But what it didn't set out in precise detail is how Greek debt will go on falling, from 124 per cent of GDP in 2020 to 110 per cent in 2022 and 88 per cent in 2030, as agreed during the talks. And it didn't say how Greece is expected to win back market confidence in 2016 even though its debt level that year is still expected to be 175 per cent of GDP. The answer is a combination of lower interest rates and longer maturities being applied to loans to Greece, Athens paying down more of its own debt thanks to growth and the potential for eurozone states to write down their loans.

The EU official said the best option would be for eurozone countries to bite the bullet and write down €40-50 billion of loans to Greece in 2016 or shortly afterwards, so that its debt-to-GDP ratio is aggressively reduced and the country can more easily return to financial markets. But that is unlikely to happen, since no Member State wants to write down any Greek debt, the cost of which would be born by taxpayers. Each state will do everything possible to ensure that any writedown, if it must happen, is as small as possible.

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