Greek options for a deal on its debts

Yanis Varoufakis Image copyright Getty Images
Image caption Greek Finance Minister Yanis Varoufakis wants a new deal on Greek debt

Greek Finance Minister Yanis Varoufakis is on an European tour to drum up support for a "new contract" with eurozone leaders over Greece's rescue programme. He's in London today and scheduled to meet with European Commission President Jean-Claude Juncker on Wednesday.

Mr Varoufakis has ruled out accepting more loans, and instead suggests that Greece should be viewed as insolvent so there should be a re-negotiation of repayment terms, perhaps linked to how the economy is doing.

Greece is in many ways a test case for sovereign debt management. In this instance, Greece may get more time to repay or what might be a form of debt re-profiling that's been debated by the IMF and others.

In other words, instead of a debt write-down, which the Germans staunchly oppose, re-profiling Greek debt would extend the repayment of the 315bn euros ($356bn; £237bn) that it owes, which comes to an eye-watering 175% of GDP.

This is despite the largest debt restructuring in history in 2012 when private creditors largely took the hit. Now, the debt is largely owed to official creditors - three-quarters of it are owed to other eurozone countries, the European Central Bank, and the IMF.

Lost decade

Even as Greece has just returned to growth and managed a primary surplus - that is, its underlying budget excluding interest payments is showing revenues exceeding spending - it's a still fragile recovery. I've written before about its economic challenges, including 25% unemployment, and how its economy has shrunk so that it's the same size as it was a decade ago.

So, the election of anti-austerity Syriza reflects the frustration of the people over not just a lost decade, but how the future looks when Greece still has the second-highest debt burden of any country in the world.

It's why the Greeks want to re-negotiate and not take on more debt.

But, those who oppose re-opening discussions point to the long average maturity of what Greece owes. The average maturity of its debt is over 15 years, which is by some stretch longer than in other eurozone nations. The think tank Bruegel estimates that interest payments come to around 4% of Greek GDP, which is lower than what Italy pays on its debt that equates to over 130% of its GDP.

However, the Greek government is worried that "debt overhang" can negatively affect economic growth. This is a hotly debated topic - recall the controversy over the Reinhardt and Rogoff article that had pointed to a 90% debt-to-GDP as a threshold.

Image copyright Getty Images
Image caption Michel Sapin says France is ready to help Greece settle with its creditors

Debt relief

For poor countries, though, debt relief programmes, such as the Highly Indebted Poor Country (HIPC) initiative that wrote down the debt of a couple of dozen sub-Saharan African countries to get the burden down to "sustainable levels," have contributed to subsequent growth.

In the HIPC programme, the IMF defines sustainability as the ability to service debt through export earnings, aid and private capital inflow without damaging growth. Some ratios that the IMF looks at to see if a poor country qualifies include a debt-to-export ratio of 150% and debt-to-fiscal revenue of 250%. Research estimates that bringing the external debt level down to 30% of GDP did boost growth.

Of course, Greece is an advanced economy, so it's not directly comparable to the HIPC countries. But, the experience of Greece has triggered another look at how the IMF should work with indebted countries and opened up a debate over what constitutes a sustainable debt level and discussion of debt re-profiling as an option.

The IMF's proposal for re-profiling requires the debt level to be sustainable. That raises a discussion about Greece, of course, but it's what is on the table now.

So, it's perhaps an option, but there are numerous questions to be answered.

Instead of writing down debt, would giving Greece more time to repay help to make those repayments compatible with a growth strategy? The French Finance Minister Michel Sapin has expressed some support on this front. Creditors still lose in a sense since they're being repaid over a longer period of time, but they're not taking a write-down on the principal lent to Greece.

And, as these are official creditors, it should be easier to facilitate an agreement than the 2012 debt restructuring which involved private lenders and "haircuts" or losses for those creditors. On the other hand, politics could make this negotiation more difficult.

Where would that leave Greek banks? My colleague Robert Peston has written about the role of the European Central Bank in terms of offering continued cash support to Greek banks if Greece refuses the next tranche of loans to be taken up at the end of the month to extend its rescue programme.

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Image caption The ECB's role will be key

'Compromise' call

Does Greece have until the end of May to negotiate this new contract? That's the amount of time the Greek Finance Minister says they need. Greece has a 2.3bn euro repayment due at the end of the month, so will they be able to make that payment? I've heard analysts say that there may be some wiggle room in the Greek budget to make that payment.

So, short of a debt write-down, there are options for Greece.

US President Obama weighed in during a CNN interview and said that "it will require compromise on all sides" to keep Greece in the eurozone.

A Greek exit or Grexit is one option that eurozone leaders would not want to contemplate.

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