Euro zone, IMF reach deal on cutting long-term Greek debt

Reuters: Euro zone Finance Ministers and the International Monetary Fund clinched agreement on a new debt target for Greece on Monday (26) in a breakthrough towards releasing an urgently needed tranche of loans to the near-bankrupt economy, officials said.

After nearly 10 hours of talks at their third meeting on the issue in as many weeks, Greece’s International lenders agreed to reduce Greek debt by 40 billion Euros, cutting it to 124% of gross domestic product by 2020, via a package of steps.

The deal should open the way for a major aid instalment needed to recapitalise Greece’s teetering banks and enable the Government to pay wages, pensions and suppliers in December. Greece could receive up to 44 billion Euros, although it remains unclear if the full amount will be paid in one go.

To reduce the debt pile, the ministers agreed to cut the interest rate on loans to Greece and return 11 billion Euros to Athens in profits from European Central Bank purchases of Greek Government bonds on the secondary market.

They also agreed to help Greece to buy back its own bonds from private investors at an expected cost of around 35 cents in the Euro, officials said.

European Central Bank President Mario Draghi said on leaving the talks “I very much welcome the decisions taken by the Ministers of Finance. They will certainty reduce the uncertainty and strengthen confidence in Europe and in Greece.”

Details of the agreement were to be announced at a news conference after the meeting ended.

The Euro strengthened against the Dollar after news of a deal was reported by Reuters.

“We’ve filled the financing gap until the end of program in 2014,” one official engaged with the talks said. A second official confirmed the figures.

Greek Finance Minister Yannis Stournaras said earlier that Athens had fulfilled its part of the deal by enacting tough austerity measures and economic reforms, and it was now up to the lenders to do their part.

“I’m certain we will find a mutually beneficial solution today,” he said on arrival for the marathon talks.

Greece, where the Euro zone’s debt crisis erupted in late 2009, is the currency area’s most heavily indebted country, despite a big ‘haircut’ this year on privately-held bonds. Its economy has shrunk by nearly 25% in five years.

Negotiations had been stalled over how Greece’s debt, forecast to peak at 190%-200% of GDP in the coming two years, could be cut to a more sustainable 120% by 2020.

The agreed figure fell slightly short of that goal, and the IMF was still insisting that Euro zone ministers should make a firm commitment to further steps to reduce the debt stock if Athens implements its adjustment program faithfully.

The key question remains whether Greek debt can become sustainable without Euro zone Governments having to write off some of the loans they have made to Athens.

A source familiar with IMF thinking said the global lender was demanding immediate measures to cut Greece’s debt by 20% age points of GDP, with a commitment to do more to reduce the debt stock in a few years if Greece fulfils its program.

To reduce the debt to 124% by 2020, the ministers were putting together a package of steps including a debt buyback funded by a Euro zone rescue fund, reducing the interest rate on loans and returning Euro zone central bank ‘profits’ to Greece.

Germany and its northern European allies have so far rejected any idea of forgiving official loans to Athens.

German Finance Minister Wolfgang Schaeuble told reporters that a debt cut was legally impossible, not just for Germany but for other Euro zone countries, if it was linked to a new guarantee of loans.

“You cannot guarantee something if you’re cutting debt at the same time,” he said. That did not preclude possible debt relief at a later stage if Greece completed its adjustment program and no longer needs new loans.

The source familiar with IMF thinking said a loan write-off once Greece has established a track record of compliance would be the simplest way to make its debt viable, but other methods such as forgoing interest payments, or lending at below market rates and extending maturities could all help.

The German Banking Association (BDB) said a fresh ‘haircut’ or forced reduction in the value of Greek sovereign debt, must only happen as a last resort.

Two European Central Bank policymakers, Vice-president Vitor Constancio and executive board member Joerg Asmussen, said debt forgiveness was not on the agenda for now.

The ministers agreed to reduce interest on already extended bilateral loans from the current 150 basis points above financing costs to 50 bps once Greece achieves a primary budget surplus of 4.5% of GDP.

Another option considered, which could cut Greek debt by almost 17% of GDP, was to defer interest payments on loans to Greece from the EFSF, a temporary bailout fund, by 10 years. It was not immediately clear if that had been agreed.

By forgoing profits on its Greek bond portfolio, bought at a deep discount, the ECB could cut the debt pile by a further 4.6% by 2020, a document prepared for meeting showed.

Not all Euro zone central banks are willing to forgo their profits, however, the German Bundesbank among them.

Before the meetings, officials had spoken of a 10 billion Euro buy-back of Greek debt that would achieve a net reduction of about 20 billion Euros in the debt stock, although the potential gain has fallen as prices have risen since the idea was first mooted.

German Central Bank Governor Jens Weidmann has suggested that Greece could ‘earn’ a reduction in debt it owes to Euro zone Governments in a few years if it diligently implements all the agreed reforms. The European Commission backs that view.

An opinion poll published on Monday showed Greece’s anti-bailout SYRIZA party with a four per cent lead over the Conservatives who won election in June, adding to uncertainty over the future of reforms.

German paper Welt am Sonntag said on Sunday that Euro zone Ministers were considering a write-down of official loans for Greece from 2015, but gave no sources, and a Euro zone official said such an option was never seriously discussed.