Your Cheat-Sheet to Greece

By Matina Stevis

The Wall Street Journal

Another week, another euro-zone finance ministers’ meeting on Greece. Christine Lagarde, managing director of the International Monetary Fund, has flown back from Asia to attend the meeting starting later today, while European Central Bank president Mario Draghi and the European Union’s economics commissioner Olli Rehn are also due to be there.

Stop reading now if you’d prefer to be woken up when it’s all over. But if you’re interested in detail on the state of negotiations over the agreement that would release a new slice of official funding for Greece, this is the place for you.

Issue 1: Debt sustainability

Making sure that Greece’s debt will fall to manageable levels in the medium term is a crucial issue for the IMF in particular. Under past agreements, official lenders agreed that Greece’s debt would be deemed sustainable if it fell to 120% of gross domestic product by 2020. But matters have deteriorated since then, and, as things stand, we’re looking at a debt-of-GDP ratio of 144% in 2020. Here’s what’s on the table as possible ways to cut that debt load.

Grace-period extension: This means Greece, which currently must start repaying bailout loans in 2022, will get another ten years of grace. Officials tell us repayments will not have to begin until 2032.

Maturity extension: This is an extension to the period over which Greece repays its bailout loans, once the grace period is over. By how many years? Will the whole repayment be extended by the same period or different parts be extended by different periods? Note that €53 billion in loans in the first Greek bailout were made bilaterally by other euro-zone governments, while the second bailout loans have come from the European Financial Stability Facility.

Debt buyback: There are €60 billion in restructured Greek government bonds held by private-sector creditors. They are trading at 23-33 cents on the euro at the moment, depending on maturity. The idea is to lend Greece money to buy back some of those from the market and retire them. How much cash can Greece get to repurchase those bonds? Where from? How many bonds should the Greeks try to buy? How should the offer price be determined? How best to to avoid legal action, given that those bonds are under English law and protect creditors against preferential treatment to others

Interest-rate reduction: The interest rate is Euribor + 1.5 percentage points for the first Greek bailout. We have reported that there has been an agreement in principle to cut it to Euribor + 0.7 or + 0.8. It can be cut further, and save Greece money. But will the loans from the euro-zone bailout funds also be reduced and, if so, how does that affect the rates Ireland’s and Portugal are paying on their bailout loans. Note that because the proposed rates are lower than the rates at which some countries like Spain and Italy pay to borrow, these countries are actually losing money. We have reported there is ongoing technical work to see if they can be compensated–for example by transfers from countries such as Germany, for which the crisis has brought benefits in the form of rock-bottom borrowing rates. If the rate cut applies to the bailout funds, their borrowing costs may be higher than the interest they are charging on their loans. What would the rating agencies think of this?

Central banks: The ECB holds some €40 billion in Greek government bonds purchased through  its Securities Market Program, the precursor to its current Outright Monetary Transactions program. National central banks in the euro zone also hold around €10 billion in their own investment portfolios. Some countries’ central banks already distribute the profits they make on these holdings back to Greece. Will the ECB do the same? In the case of the ECB, that could be a substantial gain for Greece.

Defaulting on holdouts: There are still €6 billion in Greek government bonds out there held by folks who didn’t participate in last spring’s debt restructuring. So far, they have been paid in full. There is talk of stopping repayment to the holdouts and defaulting on those bonds, a step that risks legal action.

IMF v. Euro zone: The IMF wants the date of sustainability to be 2020; Jean-Claude Juncker, the Luxembourg prime minister who presides over the meetings of euro-zone finance ministers, said publicly last week the date would be 2022, which would ease pressure on creditors to provide debt relief to Greece. The IMF has been pressing for cuts in the principal amounts of euro-zone government loans to Greece; the euro zone says that is a real red line over which it will not cross.

Issue 2: Next Loan Installment

We’ve been talking about the €31.3 billion tranche of aid withheld from Greece since June. There’s now talk of Greece getting €44 billion, which would incorporate the September and December tranches. We have reported that the extra money could go for the debt buyback exercise. When will all this happen? Greece can’t realistically expect to get the installment before early December, as a number of national parliaments  must formally sign off on the agreement before a disbursement is made.

Issue 3: Financing Gap

According to the leaked draft report last week from the troika of the ECB, IMF and European Commission, Greece needs an extra €15 billion to stay fully financed through to 2014, and another €17.6 billion to be financed for 2015-2016. We reported the meeting today will only decide on how to deal with the €15 billion. How? And what about the rest of the financing gap?

Issue 4: Sovereignty

There is also that small matter of Greece’s national sovereignty and control over spending. It has been losing it steadily to its official creditors. Now it seems that, as part a new round of concessions, it will forgo ever more control.

We reported yesterday that the special account in the Greek central bank in which the bailout funds are deposited will be co-managed by bailout fund chief Klaus Regling. Specifically, we understand that Mr Regling will have to approve the use of the bailout funds before they are deposited in the account and his staff will conduct audits immediately after they are paid out from the account to guarantee that the funds have been used appropriately. That’s to make sure Greece doesn’t divert bailout funds to pay pensions and salaries, for example, and to make sure it uses the funds first and foremost for debt servicing.