Euro Area Weighs Greek Loan Buyout, as IMF Demands Concessions

  • European Stability Mechanism may look to buy bilateral loans
  • Eurogroup meets next week to discuss Greek bailout review

Euro-area officials are weighing a proposal to purchase loans that member states made to Greece, as the International Monetary Fund reiterated calls today to ease the nation’s debt burden.

Senior finance ministry officials from the currency bloc held a conference call on Wednesday evening to discuss ways to make Greece’s 321 billion euros ($360 billion) of obligations sustainable, according to people with knowledge of the talks. One option would be for the European Stability Mechanism, the euro-area’s financial backstop, to purchase the first loans nations made to Greece, allowing the country to benefit from the ESM’s concessionary maturities and interest rates, the people said, asking not to be named because the discussions are private.

About 52.9 billion euros of bilateral loans were made to Greece in 2010 and 2011. The proposal discussed Wednesday foresees the use of potential leftovers from the current 86 billion euros support program for the purchase of a chunk of those loans, one of the people said. The weighted average maturity of ESM loans to Greece is 32.3 years, according to the organization’s website, almost twice as high as the maturity of bilateral loans. Buying out the full sum of outstanding bilateral loans would require an amendment of the current Greek bailout program and thus approval by euro area parliaments, the person said.

“We believe that it is possible to restore debt sustainability without upfront haircuts, although this would involve providing very concessional loan terms including long grace and maturity periods and very low interest rates,” IMF spokesman Gerry Rice told reporters in Washington on Thursday. “There are many options possible in order to get to a debt relief package.”

Greece’s creditors are struggling to complete a review of the nation’s third bailout, which would pave the way for the disbursal of a much-needed aid tranche. The IMF has made its participation in the program contingent upon debt relief, a prospect euro-area finance ministers began discussing last week during an emergency meeting meant to resolve the impasse in unlocking the funds. Nations including Germany have said that the IMF needs to be involved in the Greek bailout program, while resisting the fund’s calls for a deeper debt restructuring.

“I’m not discussing in detail the measures we’ll discuss, and hopefully pass, next week in Brussels,” German Finance Minister Wolfgang Schaeuble told reporters on Thursday in Sendai, Japan. “But you know that we made quite some progress two weeks ago in Brussels. We’re finalizing what we have agreed unanimously two weeks ago in the Eurogroup.” 

The ESM is also considering purchasing the IMF’s loans as a way to give Greece a financial boost since its debt terms are more lenient than those of the Washington-based fund, according to a sustainability report prepared by the European institutions. Buying back the IMF loans “amounts to debt relief,” European Commission Vice President Valdis Dombrovskis said in remarks in Brussels on Wednesday at a Politico conference.

Exchanging more expensive debt for less expensive debt would make sense for Greece, but any decision rests with Greek authorities and European governments, IMF’s Rice said Thursday, when asked about the possibility of the Fund’s loans to Greece being bought out by the ESM.

The officials considered several debt-relief options during the technical call: have the ESM purchase bilateral loans made to Greece from individual countries in the so-called Greek Loan Facility; have the ESM purchase the IMF’s obligations; and extending the maturities of Greece’s debt and reducing the interest rates, one of the people said.

Nations that joined the euro area after the first bailout expressed reservations about the ESM purchasing the bilateral loans because it would increase their exposure to Greek debt that was created before they became members of the currency union, one of the people said. If Greece were to default on its loans, euro-area states, which are shareholders of the crisis fund, would be on the hook for the losses.

The discussion on Wednesday was a technical exchange of views and no decisions were made, the person said. Finance ministry deputies will debate available options before their ministers meet on May 24.

Contingency Mechanism

The IMF and its European counterparts including the European Central Bank and the European Commission disagree on the prospects for Greece’s finances and hence on their outlook about the nation’s debt trajectory. They have asked Greece to legislate automatic spending cuts which would kick in if the country misses certain budget targets as a way to reconcile their different outlooks.

The Greek parliament will vote on additional belt-tightening equal to about 1 percent of gross domestic product ahead of next week’s meeting of finance ministers. In addition to lifting restrictions for the sale of bank loans to distressed debt funds, and raising sales, consumption, fuel, tobacco, and gambling taxes, the bill also lays out automatic spending cuts of as much as 2 percent of GDP in the event budget projections fall short.

Greece’s creditors are trying to avoid a repeat of last year’s negotiations that nearly pushed the country out of the 19-nation common currency and roiled international markets. The two sides are running out of time to release fresh aid before Greek bonds held by the European Central Bank come due in July.

Greek markets have rallied over the past weeks, as investors anticipate a deal eventually will be struck. The Athens Stock Exchange has gained about 7 percent this month, making it one of the best performing primary equity gauges tracked by Bloomberg. Greek bonds are the best-performing of all sovereign securities tracked by Bloomberg’s World Bond Indexes, having delivered a weighted 11.6 percent return in the past month.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE