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The formula for the reduction of Greek debt

05 May 2014 / 13:05:56  GRReporter
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Tomorrow, Yiannis Stournaras will ask for a discussion about the reduction of Greek debt, at what will probably be the last Eurogroup, which he will attend before taking on the Bank of Greece.

The Minister of Finance will request the implementation of the decision made in November 2012 for the reduction of debt after Athens meets the necessary conditions. The government expects a balanced statement which on the one hand can be used for political purposes of the government itself, and on the other hand will not cause reactions in other Eurozone countries three weeks before the European elections. Most likely, finance ministers will entrust Euroworking Group (a working group consisting of finance ministers’associates) with the care of development of scenarios which need to be presented at the next Eurogroup. There is no specific schedule, but concrete decisions are expected by the end of the autumn, since the Eurozone insists that debt topics and the deficit should be considered as a package. There will be no clear idea about the deficit before the announcement of the results of stress tests of banks in late October - early November. The Eurozone wants consultations on the drafting of the new EU Commission to be completed, as well as to continue pushing Athens to implement reforms envisaged by the Memorandum in the insurance sector.

Regarding debt relief, the government has considered various alternative scenarios which will be discussed at a technical level and Euroworking Group leader Thomas Wieser will submit them to Eurogroup. A common thing to all scenarios for debt reduction is the "lock" of interest rates of loans which Greece received from Member States of the Eurozone at low levels for many years. In particular:

1. An extension of the deadline for the paying back of loans to 50 years. Today, the average repayment period of loans from the Eurozone to the amount of 52.9 billion euro is 17 years and the first instalment is in 2020. Loans from the European Financial Stability Fund amount to 139.9 billion euro; their average duration is 30 years and the first instalment will be paid in 2023.

The extension will relieve the annual budget expenditures for servicing the debt in a range of 6-7 billion euro over the next 20-30 years. Afterwards there will be a corresponding aggravation.

2. Interventions in interest rates of loans from the Eurozone. Today, Greece is paying an interest equal to Euribor per quarter, plus 0.50%. In total, the interest rate is 0.83%. However, Euribor is expected to increase significantly in the coming years, reaching levels of 2-3%. Therefore, the government wants the interest rate to be constant. I.e.:

• A constant interest rate of 1% for 50 years of debt repayment. Benefits for the Greek debt will amount to 25 billion euro or about 14% of today's GDP for the entire 50-year period, or

• A constant rate for 15 years and then a review of the situation in the event that the Eurozone rejects the first proposal because of large losses. But in this case, the plan provides for an interest rate of less than 1%, with the argument that if it is not constant for 50 years, it should be at least as low as possible.

• Euribor is to remain in the range of 0.50% per quarter for a period of 5-10 years, followed by a constant interest rate for 6-7 years. Thus, Greece will benefit from today's low interest rates and afterwards there will be a certain period of a constant rate.

• A grace period for 10 or 20 years for the introduction of interest on loans from the Eurozone, similar to the grace period for interest on loans from the European Financial Stability Fund.

Tags: debt reduction interest rate Yiannis Stournaras Eurogroup
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