Euro Zone mulls new ways to cut Greek debt mountain

The author has posted comments on this articleET Bureau | Oct 15, 2012, 10.26AM IST TOKYO: 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% 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% of GDP in 2013 from around 160% 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% in 2013, its sixth consecutive year of contraction, boosting its debt ratio to 179.3%.

"At the moment it looks like Greece's debt level will rise to well above the target of 120% 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 organise voluntary buy-backs of its bonds, he said. The country is 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 billion, the official said.

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% in 2020 out of reach, euro zone officials said. DEBT FOR EQUITY

"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 recapitalisation into equity and this could help the debt ratio, but this is not going to happen before the end of next year," a second official said. The euro zone's temporary bailout fund, the European Financial Stability Facility, has already lent Greece 25 billion to recapitalise banks, and 23 billion more is awaiting disbursement.

The 48 billion would be a sizeable chunk of Greece's total debt, currently estimated at around 330 billion. Greek government spokesman Simos Kedikoglou said several options were on the table. "The ECB, which holds Greek government bonds, could satisfy itself with lower interest rates on those bonds," he told the Sunday edition of the Greek Realnewsnewspaper.

"Or, it could agree to roll them over when these bonds mature. Also, the recapitalisation of Greek banks could take place directly through the ESM as is currently being considered for Spain."

Another ECB Executive Board member, Benoit Coeure, said the central bank would not consider rescheduling the Greek debt portfolio it held ? a suggestion repeatedly made by Athens. The second euro zone official said Athens could use proceeds from the privatisation of state-owned assets to retire debt.

Source: http://timesofindia.indiatimes.com/business/international-business/Euro-Zone-mulls-new-ways-to-cut-Greek-debt-mountain/articleshow/16818753.cms

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