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Greek alternatives sought

Eurozone officials are considering new ways to reduce Greece’s huge debt because delays in reforms by Athens and continued recession have put the target of 120 per cent debt to GDP ratio in 2020 out of reach, eurozone officials said.

A Greek debt sustainability analysis prepared by the International Monetary Fund, the European Central Bank and the European Commission in March forecast Greek debt would rise to 164 per cent of GDP in 2013 from around 160 per cent in 2012 under a baseline scenario, assuming the Greek economy stopped contracting next year.

But Greece now expects its economy to shrink for the sixth year running in 2013, eyeing a 3.8 per cent contraction that would boost its debt ratio to 179.3 per cent.

“At the moment it looks like Greece’s debt level will rise to well above the target of 120 per cent of GDP by 2020,” ECB Executive Board member Joerg Asmussen told the Sueddeutsche Zeitung newspaper.

To bring it back towards the desired level in 2020, Greece could organise voluntary buy-backs of its bonds, he said.

“One has to consider elements that could make it possible to achieve that goal. One possibility would be buying back debt,” Asmussen said.

The money could not come from the ECB, but it could be lent by the European Stability Mechanism, for example, one senior euro zone official, who was in Tokyo for the weekend meetings of the International Monetary Fund and World Bank, said.

Because Greek bonds trade at very deep discounts, one euro of money borrowed from the ESM, the eurozone’s permanent bailout fund, could reduce Greek debt by €1.5 billion, offering good leverage, the official said.

Another ECB Executive Board member, Benoit Coeure, said the central bank would not consider rescheduling the Greek debt portfolio it held — a suggestion repeatedly made by Athens.

A second eurozone official said that while borrowing from the ESM would in itself increase Greek debt, there was another way to reduce it.

“What could change the overall level of debt is that, at some later stage, when banks can be directly recapitalised by the ESM, we could convert some of the eurozone loans for bank recapitalisation into equity and this could help the debt ratio, but this is not going to happen before the end of next year,” the second official further added.

The eurozone’s temporary bailout fund, the European Financial Stability Facility, has already lent Greece €25 billion to recapitalise banks, and €23 billion more is awaiting disbursement.