Eurozone Bailout Fund Proposes Short-Term Debt Relief for Greece

ESM proposes extension on some maturities and locking in the interest on some loans to ease Greece’s debt load

The Wall Street Journal

By VIKTORIA DENDRINOU
Updated Nov. 30, 2016 7:57 a.m. ET
2 COMMENTS
BRUSSELS—Confidential proposals drawn up by the eurozone’s bailout fund could reduce Greece’s debt load by about a fifth in 2060.

A six-page document, dated Nov. 25 and seen by The Wall Street Journal, was produced by the European Stability Mechanism, the Luxembourg-based eurozone bailout fund. It outlines measures that could be taken in the near future to reduce Greece’s large debt load.

The paper proposes to ease Greece’s debt load by extending some maturities and locking in the interest on some of Greece’s loans to shield it from future interest-rate increases.



The cumulative impact of these measures in 2060 would cut the ratio of debt to gross domestic product by 21.8 percentage points.

An official eurozone analysis in May projected debt-to-GDP of 104.9% in 2060, under a baseline scenario in which Greece fully implements its bailout program.

“This is an ESM working document that has not yet been endorsed by the euro area finance ministers. The document comes in response to the mandate the ESM was given by [euro area finance ministers] on May 25 to work for the short-term on a first set of measures to improve the debt sustainability for Greece,” an ESM spokesman said.

He said ESM Managing Director Klaus Regling would present the proposals to eurozone finance ministers at their next meeting on Dec. 5. Eurozone officials expect them to win the ministers’ backing.

The measures outlined would be implemented between now and the end of the bailout in mid-2018.

In May, Greece’s creditors agreed on a framework to bring Greece’s debt to sustainable levels, without burdening European taxpayers, that also included medium and long-term measures.

These longer-term measures—including maturity extensions, interest -rate caps and deferrals but no reduction of the face value of the debt—would only be taken “if necessary ” and would be decided at the end of the country’s bailout in mid-2018.

Greek debt is expected to peak at 181.6% of GDP in 2016, according to European Union economic forecasts published this month.

Easing Greece’s debt load is a key condition for the International Monetary Fund before it can participate in Greece’s bailout and start doling out fresh loans. Several eurozone countries—led by Germany and the Netherlands—have demanded IMF participation as a condition for them to agree on fresh loans.


The IMF has been pressing for deeper debt relief that the eurozone has so far been willing to grant, and officials say the short-term measures wouldn’t on their own be sufficient to meet IMF requirements.

The ESM paper proposes three sets of short-term measures, the most effective of which would lock the interest rate Greece pays on some current and future loans, shielding the country from paying higher interest rates in future.

These range from exchanging floating-rate bonds held by Greek banks as part of the country’s bank recapitalizations for fixed -rate ones, and using interest-rate swaps to fix the payouts Greece pays on some ESM loans. They also include making some future disbursements to Greece in fixed-rate loans.

Other measures in the paper include extending the maturity of some loans to 32.5 years from 28.3 years.

Another measure would see the waiving of an interest rate penalty Greece would pay in 2017 on some of its loans, related to old privatization targets. Abolishing the penalty from 2018 onward will be examined as part of the medium-term measures.

While the measures outlined in the paper would cumulatively cut 21.8 percentage points of the debt-to-GDP ratio in 2060, the ESM paper warns that the eventual impact would largely depend on market conditions.

Write to Viktoria Dendrinou at viktoria.dendrinou@wsj.com