EU to Assess Greek Debt Burden, Servicing Costs After Review

 Rebecca Christie

Bloomberg

The European Commission said it will assess Greece’s debt burden and servicing costs once Prime Minister Alexis Tsipras shows his nation will meet the commitments under its new bailout program.

For debt relief talks to proceed, Greece needs to implement the reforms it has already passed, enact further required measures and pass its first program review, European Union Economic Affairs Commissioner Pierre Moscovici told reporters Monday in Brussels. At that point, he said, authorities can review “under what conditions the Greek debt will be sustainable” and how to “reduce the servicing of the debt.”

Debt relief talks should be able to start by the end of November if Greece sticks to the schedule, Moscovici said. He said he’ll be in Athens on Wednesday and Thursday to discuss the program with Tsipras, Finance Minister Euclid Tsakalotos and other officials.

The Athens Stock Exchange Index fell 0.3 percent at 11:09 a.m. local time Tuesday, while Greek government bonds rose, with the yield on the 2-year note declining 12 basis points to 9.58 percent.

Greece is up against tight deadlines to keep its 86 billion-euro ($98 billion) third bailout on track and stave off another round of turmoil over its membership in the currency zone. In approving the rescue, euro-area finance ministers set out a complicated schedule of what money can be accessed when.

To start, 3 billion euros must be unlocked -- in two installments -- by the end of November. Milestones for the first 2 billion-euro payment, expected this month, have been set, while the requirements for a further 1 billion will be determined later.

November Deadline

On top of that, Greece has until Nov. 15 to unlock 15 billion euros set aside for bank recapitalization. An additional 10 billion euros of bank funds is sitting in a segregated account at the European Stability Mechanism firewall fund. This money is tied to the first program review, although policy makers have left the door open to separating out financial milestones from the first review.

Tapping the banking funds is “subject to the completion of the planned Asset Quality Review and stress test and the implementation of the financial sector deliverables of the review,” European Central Bank President Mario Draghi said in an interview with Kathimerini newspaper published Sunday. The ECB is conducting the review and stress tests on Greece’s four biggest banks: National Bank of Greece SA, Piraeus Bank SA, Eurobank Ergasias SA and Alpha Bank AE.

Debt Burden

While the bank money needs to be released by Nov. 15, it’s not clear exactly when the first program review will conclude. Greece needs to pass this test in order to begin talks on easing its debt burden and on the International Monetary Fund’s role in the bailout program.

“We’ll have to deal with that after the months of October-November,” Moscovici said in an Oct. 8 interview in Lima, where the IMF held its annual meetings. “I believe that the IMF will be there, I hope that the IMF will be there, it’s necessary that the IMF is on board with us.”

The Washington-based IMF has set two goals -- Greek bailout compliance and European debt relief -- for resuming funding to Greece and considering a new aid program, said Poul Thomsen, head of the IMF’s Europe Department.

“Greece cannot deal with the debt without debt relief,” Thomsen told reporters Oct. 9 in Lima, citing IMF forecasts that the debt burden would reach 200 percent of gross domestic product if no actions were taken.

‘Strong and Convincing’

The IMF is willing to consider Greece’s servicing demands as well as overall debt levels, Thomsen said. At the same time, he said the euro area will need to offer “strong and convincing debt relief” that goes beyond the current terms.

“If Europe wants to go the route of providing debt relief by lengthening grace period, lengthening the repayment period, we are looking at significant lengthening of grace period and significant lengthening of the repayment period compared to where we are now,” Thomsen said.

Dutch Finance Minister Jeroen Dijsselbloem said Greece’s “debt management should be OK” because of what the euro-area has already done to ease bailout loan terms. “We are going to look at how Greece can manage its debt on an annual basis, debt service,” he said in an Oct. 8 interview in Lima. Dijsselbloem leads the group of euro-area finance chiefs.

Tsakalotos, the Greek finance chief, said Sunday that “a substantial discussion on debt will begin immediately.”