Greece’s bailout costs could rise over life of loans, ESM chief financial of­fi­cer says

Kathimerini English - - Focus - BY RE­BECCA CHRISTIE

Like a fine wine, Greece’s bailout could get more ex­pen­sive as it ages.

The Euro­pean Sta­bil­ity Mech­a­nism has so far charged Greece about 1 per­cent on the funds re­leased from the 86bil­lion-euro ($98 bil­lion) bailout that Prime Min­is­ter Alexis Tsipras won in Au­gust. Those costs aren’t locked in for the life of the loan though, ESM chief financial of­fi­cer Christophe Frankel said in an in­ter­view.

“We can’t guar­an­tee that the rate will re­main at such a low level,” Frankel said. “We know that what we charge to­day is not what we will charge to­mor­row and of course is very dif­fer­ent from what we may charge in five years or 10 years time.”

The prospect of “very dif­fer­ent” in­ter­est rates adds an ex­tra di­men­sion to the chal­lenges con­fronting Tsipras as he em­barks on a sec­ond term in of­fice. Un­less he can get the Greek econ­omy mov­ing and the debt fall­ing be­fore Euro­pean bor­row­ing costs start to rise, his ef­forts at sta­bi­liz­ing the coun­try could face an ad­di­tional head­wind.

“If mar­ket in­ter­est rates ever start to move up, we should be pre­pared for either new fis­cal back­lashes and/or new bar­gain­ing about the so-called ad­di­tional ser­vice charges from the ESM,” said Carsten Brzeski, chief econ­o­mist at ING-Diba in Frank­furt. “This is as good as it gets.”

Cre­ated in 2012, the ESM was the euro area’s flag­ship ef­fort to build a buf­fer be­tween the cur­rency zone and the sov­er­eign debt cri­sis. The fire­wall fund bor­rows on be­half of the en­tire euro area and of­fers res­cue fund­ing for na­tions that have lost ac­cess to the mar­kets.

Bow­ing to bailout con­di­tions gives Greece a way to ac­cess cash when it’s shut out of the mar­ket, and so far, low costs have been a con­sis­tent bailout perk. The ESM’s cur­rent rates are even lower than the price it pays to bor­row on the long-term mar­kets. The bailout fund sold 3 bil­lion of 30-year bonds on Oc­to­ber 13 with an im­plied yield of 1.785 per­cent. Its short-term bills are cur­rently trad­ing at neg­a­tive rates.

The loan charges are par­tic­u­larly low now be­cause the Euro­pean Cen­tral Bank has pushed rates to record lows and the ini­tial mix of debt that the ESM uses to fund its bailout pro­gram was tilted to­ward short-term debt. Like most of the euro area’s bailout pro­grams, Greece’s lat­est pro­gram be­gan with a hefty lump sum pay­out – in this case a 26-bil­lion-euro dis­burse­ment. The ESM used a mix of bill and bond sales to raise the cash, and it also is­sued float­ing-rate notes to be set aside for bank re­cap­i­tal­iza­tion.

Go­ing for­ward, the short­est debt will be rolled over into a mix of longert­erm debt. This is likely to push rates up, and mar­ket con­di­tions also could see the ESM’s bor­row­ing costs rise. At the same time, the fund­ing costs will be lower than if the ESM were try­ing to bor­row at terms that ex­actly matched the length of the loans it of­fers to Greece.

“From one day to an­other, the cost of funds can change,” Frankel said. “It does not change ev­ery day but it may change from time to time de­pend­ing on new is­suance or bonds com­ing to ma­tu­rity.”

Greece’s loan fees on the new bailout are the same as the ESM charges to other coun­tries that have re­ceived bailouts – so far, Spain and Cyprus. Older euro-area bailouts came from the ESM’s tem­po­rary pre­de­ces­sor, the Euro­pean Financial Sta­bil­ity Fa­cil­ity. Both bailout funds are aim­ing for an av­er­age debt ma­tu­rity of be­tween five and eight years, the same range sought out by sov­er­eign bor­row­ers.

Frankel said bailout coun­tries won’t be get­ting any rude sur­prises.

“We are very clear and very cau­tious in men­tion­ing any rate, be­cause there are a lot of rea­sons why the rate could go up in the fu­ture,” Frankel said. “It could also go down – for the time be­ing, this is al­ways what we have ex­pe­ri­enced, by the way – but it could go up again in the fu­ture.”

Peo­ple walk along the com­mer­cial Er­mou Street next to graf­fiti read­ing ‘Troika’ in cen­tral Athens, this week. The Euro­pean Sta­bil­ity Mech­a­nism has so far charged Greece about 1 per­cent on the funds re­leased from the 86-bil­lioneuro ($98 bil­lion) bailout that Prime Min­is­ter Alexis Tsipras won in Au­gust.

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