IMF Proposes Tough Task for ESM as Greece Seeks Sustainable Debt

  • Fund suggests ESM issue long-dated bonds to lock in low rates
  • Move will ‘buy further time for Greece’: Smith & Williamson

As European finance ministers meet in Brussels to decide on the next bailout payment to Greece, the International Monetary Fund has come up with a solution to reduce financing costs that may leave the bond market with indigestion.

The IMF suggested in a report that the European Stability Mechanism, the euro area’s crisis-fighting fund, sell 200 billion euros ($224 billion) in long-dated bonds to lock in record-low borrowing costs to refinance Greece’s debt. That would compete with governments including France and Spain that recently boosted their multi-decade bond sales.

“I am sure that issuing long-dated bonds at record-low interest rates makes sense for ESM as borrowers, but who will be the lenders?” said John Anderson, a London-based money manager at Smith & Williamson Investment Management. “That is a big amount for the market to absorb. Greece’s debt is not being reduced.”

Despite all the efforts to shrink Greece’s debt since the start of the financial crisis, the country’s economy has shrunk at a faster pace. That means its obligations have become increasingly onerous. With the country’s debt-to-gross domestic product almost 70 percentage points larger than it was in 2008, the IMF is insisting that more restructuring is required to make the nation’s finances sustainable.

IMF Strategy

The stability mechanism “could attempt to take advantage of the still-favorable interest rate environment by trying to lock in rates for the entire stock” of ESM loans at current market rates,” the IMF said in its report.

Euro-area finance ministers convened to discuss the disbursement of a proposed 11 billion euros in aid for Greece, and for talks on how to ease its debt through lengthening loan maturities, lowering interest rates and postponing payments. With almost all of Greece’s debt now held by official lenders, it’s mostly taxpayers who will be footing the cost rather than investors.

The IMF and officials from European creditors will join the ministers to wrangle over the scope of relief with the Washington-based fund urging for most drastic measures.

‘Buy Time’

“The move will cut the annual debt-servicing costs, but the fundamental problem of the Greek economy being unable to function whilst in the euro remains,” Smith & Williamson’s Anderson said. “What it will do, of course, is buy further time.”

Greece’s 10-year bond yield was little changed at 7.27 percent as of 4:40 p.m. in London. It dropped to 7.18 percent earlier, the lowest this year, compared with more than 44 percent in March 2012.

The IMF said that if “the market for long-dated bonds cannot absorb the whole estimated stock of about 200 billion euros that would have to be placed during the duration of the program, member states would need to find another way to ensure that the cost of refinancing Greek debt in an environment where long-term rates gradually normalize is not placed on Greece.”

Greek bonds, the most illiquid in the European market, returned 11.6 percent this year through Monday amid optimism its government will be able to convince creditors to extend the lifeline. The gain beat other sovereign securities in the region, according to Bloomberg World Bond Indexes.

The average yield on euro-region bonds due in 15 years or more is 1.55 percent, according to Bank of America Merrill Lynch indexes. That compares with a record 1.11 percent in 2015, and more than 5 percent in 2008.

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