ESM Proposal for Greek Debt Cut in the Long Term

ESMThe European Stability Mechanism proposes three sets of complementary measures to ease the Greek debt in the long term, according to Reuters.

Reuters has seen a paper in which the measures are outlined. Under the plan, the average maturity of some European Union 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.

It is estimated that the measures would reduce Greece’s debt by up to 21.8 percentage points compared with its gross domestic product by 2060.

Essentially 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 program 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 whether to join the bailout program.

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 program would be more credible and reduce risks for German taxpayers.

[Source: Reuters]