Debt Concessions

Euro Finance Ministers Bend on Greece

euro finance ministers-ap
Dutch finance minister and chair of the Eurogroup finance ministers Jeroen Dijsselbloem (right) and Greece's Finance Minister Euclid Tsakalotos have plenty to smile about after Monday's meeting.

One more time, Europe plans to meet Greece halfway in a bid to keep the beleaguered Mediterranean country out of bankruptcy. Athens will have to pay back its huge debt load later and with less interest than originally promised.

Euro-zone finance ministers agreed to a plan at a meeting in Brussels Monday to grant Greece debt relief by extending maturities, limiting repayments and capping interest rates from 2018, if the country delivers by then on all reforms agreed under its present bailout.

But the steps still don’t go quite as far as Athens had hoped. They don’t include a reduction in the principle of Greece’s loans from the 19-nation euro zone, totaling more than €200 billion ($228 billion).

The talks on Monday were about “exploring options,” said Jeroen Dijsselbloem, the Dutch finance minister who presided over the meeting, adding that without some form of debt relief, the country would likely never be able to repay its debt.

But Mr. Dijsselbloem categorically ruled out crossing two “red lines.” These would be offering a debt “haircut,” which would forgive part of the debt, and abandoning the current aid program.

The plan, approved by the finance ministers, is to be finalized by their deputies ahead of a second meeting on May 24.

In reality, the deal came down to two major players, in the form of a compromise between German Finance Minister Wolfgang Schäuble and Christine Lagarde, the head of the International Monetary Fund.

Pressure on the German finance minister is mounting, not just from the IMF and Greece, but possibly also from the office of his boss, Chancellor Angela Merkel.

The two major European players had been at loggerheads ahead of the meeting over the right path for Greece.

Mr. Schäuble has so far rejected a debt haircut as “unnecessary.” His stance has been that Greece doesn’t require any relief, since it doesn’t have to service its debt until after 2022, when a 10-year grace period expires.

In a letter to Mr. Schäuble and the other euro-zone finance ministers ahead of the meeting, Ms. Lagarde of the International Monetary Fund said it was “unrealistic” to demand further cuts and austerity measures from the Greeks that go beyond those commitments already made. She warned that the IMF’s involvement in a third aid program for Greece was uncertain if the country’s European partners refused to grant Athens substantial relief of its debt.

But ahead of Monday’s meeting, Mr. Schäuble appeared no longer explicitly opposed, evading questions on the issue as a possible sign of his willingness to make concessions. He left the meeting without speaking to the media.

In a statement after the meeting, the ministers said they expected their agreement on debt relief to Greece “to allow the IMF to participate in the program.”

Everyone wants the latest row over Greece to be resolved quickly. Many worry that another protracted debate over Athens might strengthen the “Vote Leave” campaign in Britain’s June 23 referendum on whether to stay in the European Union.

A confidential document used by the ministers for the talks, obtained by Handelsblatt, details the measures to ease the country’s debt load and shows how the burden would have grown without additional relief measures.

Under the most pessimistic scenario noted in the document, Greece’s debt could soar to a staggering 258.3 percent of gross domestic product, or GDP, by 2060.

The document outlines measures for the short, medium and long term. While the short-term focus would be on optimizing debt management, the medium-term objective would be longer grace periods and maturities. For the long term, if Greece met its primary surplus target of 3.5 percent of GDP, the finance ministers would in 2018 consider whether to grant more debt relief to keep the country’s debt-servicing costs sustainable.

The agreement by the euro-zone ministers to offer Greece concrete debt-relief options by May 24 followed a move early Monday morning by Greek policymakers to approve a package of unpopular pension and tax reforms. The pension reform aims at saving €1.8 billion, or 1 percent of GDP, from the pension system. The same amount is to be raised through income tax hikes.

The package, pushed through parliament by Greece’s once hard-line, left-leaning Prime Minister Alexis Tsipras, was one of the conditions Greece had to accept to unlock at least €5.4 billion in new loans from the third aid program, worth a total €86 billion.

The measures are aimed at ensuring that the country will be able to reach an agreed 3.5 percent budget surplus target in the medium and long term. The euro zone argues that would help it regain access to bond markets and make its debt sustainable, though the IMF has suggested the primary surplus target is unrealistically high and should be lower.

Now Greek pensioners face new cutbacks. People starting work will be hit hardest: They’ll pay higher contributions and will get lower benefits when they retire.

Further reform measures are to follow in coming weeks, including sales tax hikes for gasoline, natural gas, tobacco, alcoholic beverages and mobile phone calls.

The real-estate tax, which Prime Minister Tsipras campaigned to abolish when he was opposition leader, will now be increased. New taxes will also be levied on Internet connections, pay TV and coffee. And tourists will soon start paying a tax on “overnight stays.”

 

Ruth Berschens heads Handelsblatt’s bureau in Brussels. John Blau is a senior editor at Handelsblatt Global Edition and Gerd Höhler is Handelsblatt’s correspondent in Athens. To contact the authors: berschens@handelsblatt.com, blau@handelsblatt.com and hoehler@handelsblatt.com

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