Greece may not need debt hair­cut

The Pak Banker - - OPINION - Hugo Dixon

How un­sus­tain­able are Greece's bor­row­ings? This ques­tion has moved cen­tre-stage af­ter the euro zone agreed on Aug. 14 to lend Athens up to 86 bil­lion eu­ros in a new bailout pro­gramme. The euro zone is keen that the In­ter­na­tional Mon­e­tary Fund also lends money in the bailout. But the IMF thinks Greece's debt is un­sus­tain­able and won't pro­vide more loans un­less the euro zone gives Athens re­lief on its ex­ist­ing bor­row­ings. The snag is sev­eral euro zone coun­tries, in­clud­ing Ger­many, are re­luc­tant to cut the debt bur­den.

This isn't some­thing that ought to scup­per the deal. The euro zone has agreed to pro­ceed with­out the IMF, in the hope that it will join in later. It will con­sider debt re­lief af­ter the first re­view of the new bailout, which could be as soon as Oc­to­ber. But it won't agree to a hair­cut on the face value of the debt. So there should be a ba­sis for an agree­ment. This would in­volve giv­ing Greece longer both be­fore it starts re­pay­ing its debt and be­fore it needs to fin­ish the job. But the devil will be in the de­tail, in par­tic­u­lar over how to mea­sure debt sus­tain­abil­ity. The tra­di­tional ap­proach, look­ing at debt-to-GDP ra­tios, is not suit­able for Greece be­cause its bor­row­ings are mostly on con­ces­sion­ary terms. The euro zone loans al­ready have long grace and re­pay­ment pe­ri­ods, as well as ex­tremely low in­ter­est rates. A crude debt-to-GDP ra­tio - which, in Greece's case, is ex­pected by both the euro zone and IMF to peak at about 200 per­cent - doesn't take any ac­count of these ben­e­fits.

An al­ter­na­tive would be to look at the present value of Athens' debt - what its to­tal fu­ture debt pay­ments are worth in to­day's money. The Euro­pean Sta­bil­ity Mech­a­nism, the euro zone's bailout fund, says that all the con­ces­sions so far given to Greece have re­duced the present value by the equiv­a­lent of 49 per­cent of GDP. If one sub­tracted that from the head­line ra­tio - as­sum­ing, for sim­plic­ity, that all the other debt is kept at face value - Greece would be left with 150 per­cent of GDP. One can also cal­cu­late the present value of the new 86 bil­lion euro loans, which will pay in­ter­est at only 1 per­cent and have an av­er­age ma­tu­rity of 32.5 years. The present value of that loan is around half its face value. By giv­ing Athens such gen­er­ous terms, the euro zone has al­ready given it fur­ther debt re­lief of around 40 bil­lion eu­ros. Sub­tract that and its bor­row­ings would be un­der 130 per­cent of GDP - still high but not out of line with other in­debted Euro­pean coun­tries such as Italy.

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