On The Road to Debt Write-Off
It took three additional meetings over the last three weeks, but EU Finance Ministers finally found a way late last night in Brussels to strike a new Greek deal.
As this writer suggested in "Europe Update", existing Greek debt is to be re-structured, so significantly (40 billion euro over 8 years) that, under the plan, the debt-to-GDP ratio is forecast to fall from as high as 190% in 2014 to 124% by the end of this decade. This is to be accomplished by cutting the interest rate on official loans by 100 basis points, extending their maturity by 15 years to 30 years, granting a 10-year interest repayment deferral, and giving back to Greece as much as 11 billion euros of the capital gains accruing to national central banks from European Central Bank repurchases of Greek government bonds in the secondary market. This latest deal will allow for the release next month, in stages, of the next tranche of 44 billion euros from the existing bail-out loan. Greece will thus be liquid again, for now.
One could be tempted to argue that such a debt re-structuring is so sweeping as to amount to a de facto debt forgiveness. But, technically, it is not - a point of crucial importance to Germany particularly. Chancellor Merkel, who faces a national election next September, needed to avoid the risk of alienating her bail-out-weary German electorate by agreeing to any write-off of Greek debt, yet at the same time mitigate the Greek debt burden to prevent an immediate collapse of that country's economy and the attendant impact across all of Europe. This re-structuring appears to do just enough to meet both criteria.
There is little doubt, however, that actual debt forgiveness will be required, likely sometime after the 2013 German election. Even if forecast assumptions turn out to be correct, Greek debt amounting to 124% of GDP by 2020, on however favorable terms, is simply not sustainable. Indeed, German Finance Minister Schaeuble said last night, "When Greece has achieved a primary budget surplus (the budget balance before debt interest payments) and fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt".
Thus, many more chapters, on Greece and Europe, remain to be written.