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Eurozone to Cap Greek Debt Servicing at 15 pct of GDP

Eurozone governments agree that debt relief for Greece should be accomplished by capping its debt servicing costs at 15 percent of gross domestic product, Reuters says.
Eurozone President Jeroen Dijsselbloem, said on Thursday that debt easing can be discussed only after Athens successfully passes the first review of its bailout program later this year.
“There is a broad understanding about the method we should choose, that is to look at the annual financing needs for the sovereign debt,” Dijsselbloem told Reuters in an interview.
“Second, there seems to be a broad understanding that a good standard would be to have the cap at a maximum of 15 percent of GDP,” he said.
“And third, and we are working on that with the European Commission and the International Monetary Fund, would be to have a common understanding of scenarios: What are the realistic expectations in a normal scenario? Or in an adverse scenario in terms of growth and inflation, etc?” he said.
The Greek government has been pushing for a haircut on Greece’s nominal state debt, which is to exceed 180 percent of GDP in 2015, according to European Commission forecasts.
However, Eurozone finance ministers argue that what matters more than the nominal value of the debt is how much it burdens the economy through annual debt servicing costs, according to the Reuters report.
Currently, two-thirds of Greek debt is now held by Eurozone governments that extended loans to Athens with an average maturity of 31-32 years and an interest rate of around 1 percent.
Moreover, Greece does not have to start repaying these loans until 2022, all of which makes the annual debt burden for Greece quite manageable, Eurozone officials argue.
According to the report, Dijsselbloem indicated that a complete upfront debt relief deal might not be the best solution. “We will see if there are any financing peaks in the coming 30 years,” he said.
“The European Stability Mechanism’s analysis has shown that the first financing humps will, maybe occur in 15 years. So, if that is the case, it would be strange to already try to tweak those – they are very far away,” he said.
“But we will see – it very much depends on the scenarios we work on with the IMF,” Dijsselbloem added.
IMF believes the annual cap should be 10 percent of GDP
The International Monetary Fund believes that the standard 15 percent of GDP that has worked for most economies, is too high for Greece. The Fund proposes an exceptional 10 percent of GDP for servicing Greek debt.
“My understanding was that the IMF always works on the 15 percent standard, but if they say that this is too high for Greece, then this is one of the issues we will have to discuss with them,” Dijsselbloem told Reuters.
Some EU officials privately point out the IMF was pushing for debt relief for Greece while expecting to be paid back in full itself. The Eurozone president refused to comment on whether the IMF should agree to restructure its loans to Greece, too.
IMF loans to Greece are four times more expensive than money borrowed from the Eurozone, and the third bailout for Greece would reduce Athens’ reliance on them, Dijsselbloem said.
“With the 86 billion euros, what we are doing is we are repaying the IMF, because the IMF is very expensive,” Dijsselbloem said. “We are repaying it with ESM loans, which are much, much cheaper.”
“Part of the current programme is phasing out the IMF and phasing in more European loans,” he said. However, he added, it was politically very important that the IMF remain involved in the third bailout, even if it were not to contribute financially.
“It is crucial that they are involved for the credibility of our programme and political support in Germany, the Netherlands, etc,” Dijsselbloem said.

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