Euro zone mulls new ways to cut Greek debt mountain

Monday, 15 October 2012 00:00 - - {{hitsCtrl.values.hits}}

TOKYO (Reuters): Euro zone officials are considering new ways to reduce Greece’s huge debts because delays to reforms by Athens and continued recession have put the target of a debt to GDP ratio of 120 percent in 2020 out of reach, euro zone officials said.

A Greek debt sustainability analysis prepared by the International Monetary Fund, the European Central Bank and the European Commission in March forecast Greek debt would rise to 164 percent of GDP in 2013 from around 160 percent in 2012 under a baseline scenario assuming the Greek economy would stop contracting next year.

But Greece now expects its economy to shrink by 3.8 percent in 2013, its sixth consecutive year of contraction, boosting its debt ratio to 179.3 percent.

“At the moment it looks like Greece’s debt level will rise to well above the target of 120 percent of GDP by 2020,” ECB Executive Board member Joerg Asmussen told the Sueddeutsche Zeitung newspaper.

To bring it back towards the desired level in 2020, Greece could organize voluntary buy-backs of its bonds, he said.

The country is currently locked in talks with its lenders on a further set of cuts and reforms in order to obtain a new loan tranche. A deal should be reached by the time EU leaders meet on October 18-19, Greek Prime Minister Antonis Samaras said in an interview with the Sunday edition of daily Kathimerini.

Money for buy-backs could not come from the ECB, but it could be lent by the European Stability Mechanism, for example, one senior euro zone official, who was in Tokyo for the weekend meetings of the International Monetary Fund and World Bank, said.

Because Greek bonds trade at very deep discounts, one euro of money borrowed from the ESM, the euro zone’s permanent bailout fund, could reduce Greek debt by 1.5 euros, the official said.

A second euro zone official said that while borrowing from the ESM would in itself increase Greek debt, there was another way to reduce it.

“What could change the overall level of debt is that, at some later stage, when banks can be directly recapitalised by the ESM, we could convert some of the euro zone loans for bank recapitalization into equity and this could help the debt ratio, but this is not going to happen before the end of next year,” the second official said.

The euro zone’s temporary bailout fund, the European Financial Stability Facility, has already lent Greece 25 billion euros to recapitalize banks, and 23 billion more is awaiting disbursement.

The 48 billion euros would be a sizeable chunk of Greece’s total debt, currently estimated at around 330 billion euros.