Debt relief open to Greece, says Merkel

Greece could receive relief on its debt mountain within months as soon as creditors confirm that it is making good on promised economic reforms, Angela Merkel i has said.

In an interview with German TV network ARD on Sunday (19 July), the German chancellor said that measures to cut Greece’s debts could soon be offered to Athens, although she ruled out a ‘classic haircut’ on debt.

"Greece has already been given relief. We had a voluntary haircut among the private creditors [in 2012] and we then extended maturities once and reduced interest rates," said Merkel. “We can now talk about such possibilities again... once the first successful review of the programme to be negotiated has been completed," she added.

Projections

This would involve officials from the Troika, representing the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF), assessing whether Athens had correctly implemented the terms of its bailout.

The Greek government of Alexis Tsipras i reluctantly signed up to a third bailout package worth up to €86bn last week, passing a series of new austerity measures through the national parliament, but insists that its programme will not be sustainable without a further write-down of its debt mountain which totals more than 175 percent of GDP.

For its part, the IMF, which will publish a new analysis of Greece’s debt profile in the coming weeks, has said that it will not be part of a third Greek programme unless its debt burden is reduced.

The IMF’s internal rules do not allow it to lend to countries with debt burdens that will remain over 120 percent of GDP over a sustained period.

The previous Greek programme had initially forecast that the country’s debt would fall below 120 percent by 2020, but an IMF staff paper released earlier this month prior to Greece’s referendum on its proposed bailout terms argued that even “assuming official concessional financing through end-2018, the debt to GDP ratio is projected at about 150 percent in 2020, and close to 140 percent in 2020”.

Haircut

The Washington-based Fund, which proposed a write-off of Greek debt that would reduce it to 107 percent, also argues that Greece should be given a 20-year grace period before it begins to make debt repayments, with the final repayments not concluding until 2055.

However, like her finance minister, Wolfgang Schäuble i, who maintains that the EU treaties forbid a formal write-off of Greek debt, Merkel reiterated that “a classic haircut of 30, 40% of debt cannot happen in a currency union,” hinting that debt relief would consist of extending the maturities of its loans and reducing the interest rates.

European leaders last week approved a €7 billion bridging loan which will enable Greece to repay debts to the European Central Bank and the IMF due on Monday and to keep afloat until the new bailout can be finalised.