Euro zone finance ministers will discuss next week proposals by the bloc’s bailout fund to cut Greece’s debt, but with effects that would only kick in in several years’ time, putting the International Monetary Fund’s support for the measures in doubt.
The European Stability Mechanism paper, seen by Reuters, proposes three sets of complementary measures to cut Greece’s debt burden, the heaviest in the euro zone compared with the size of its economy, as part of an 86 billion euro ($91 billion) bailout programme.
Under the plan, the average maturity of some EU loans to Greece could be extended by about 4 years and the floating interest rates on some loans to Greece could be changed to fixed-rate loans to make them safer.
These measures would reduce Greece’s debt by up to 21.8 percentage points compared with its gross domestic product (GDP) by 2060.
But the plan would start to significantly reduce Greece’s debt-to-GDP ratio only in 2030, when the debt would drop by 2.5 percentage points if all proposed measures were applied, the paper showed in a table with projections for only some of the years from 2016 to 2060.
The measures, particularly the interest rate swap, would increase the Greek debt-to-GDP ratio from 2018 to 2022.
The ESM estimated that, under a baseline scenario of economic forecasts, swapping floating rate debt to fixed-rate would actually push up the debt-to-GDP ratio by 0.4 percentage points in 2022.
The proposed measures would leave the debt unchanged this year and would reduce it by 0.1 percent point in 2017.
“The aggregate impact of these measures will depend on the size and timing of market transactions, and the combination of schemes,” the ESM warned in the paper.
The plan concerns only so-called short-term measures that would be applied before 2018, when the current bailout programme for Greece will expire.
It does not include any medium or long-term measures. The International Monetary Fund has said it wants more clarity on debt relief measures for Greece over the longer term, before deciding on weather to join the bailout programme.
The participation of the IMF is considered crucial by Germany, the largest economy in the euro zone. Berlin believes that with the IMF on board the bailout programme would be more credible and reduce risks for German taxpayers.
In a regular meeting on Dec. 5 in Brussels, euro zone finance ministers will assess the ESM proposals and Greece’s progress in reforms required within the bailout programme, with labour reform being the most contentious issue.
The IMF will consider joining the bailout programme only after EU and Greek negotiators have agreed on the reforms needed to make Greece’s economy sustainable.
The managing director of the IMF, Christine Lagarde, will not participate in next week’s meeting, a euro zone official said, noting that medium-term measures will not be on the table.
Greek and EU officials said this week that a second meeting of euro zone finance ministers is likely later in December to finalise a possible deal with the IMF.
EU lenders, the IMF and Greece are also at odds with Greece’s fiscal targets after the end of the programme. Germany and other EU creditors want Greece to have a 3.5 percent primary budget surplus – excluding debt-servicing costs – in 2018 and in following years.
The IMF considers these requests as unrealistic, unless Greece applied new wide-ranging austerity measures.