The head of the euro zone’s bailout fund has cast doubt on official assessments of how much Greece’s debt is really weighing on its economy, in the latest signal that the currency bloc is stepping away from commitments to reduce the country’s debt mountain.
Last November, the currency union’s finance ministers sealed a new bailout deal for Greece that was meant to bring the country’s debt down to 124% of its gross domestic product by 2020, from around 170% currently. Crucially, the ministers also promised that Greece’s debt would be “substantially lower than 110%” of GDP by 2022.
That commitment, made after months of uncertainty that pushed Greece to the brink of leaving the euro zone, was central for the IMF. Fund officials said at the time that the IMF wouldn’t be able to lend any more money to Greece unless there was a realistic chance the loans would be repaid. They also raised expectations that euro-zone governments would forgive Greece part of its debt, despite denials from rich countries like Germany.
But now, senior European officials are attacking the calculations on Greece’s debt that formed the basis of the November deal as well as the targets. In a recent interview with The Wall Street Journal, Klaus Regling, managing director of the European Stability Mechanism, said that to accurately evaluate the sustainability of Greece’s debt, more heed had to be paid to the exceptionally low interest rates Athens was paying and to the long repayment schedule - conditions that set it apart from other high-debt countries.
Regling’s comments provide backing for Germany and other euro-zone countries that have conceded Athens will likely require a third bailout but have resisted demands from the International Monetary Fund and elsewhere that they forgo repayment on some of the money already lent. “It’s not sufficient to have a target of a certain debt ratio,” Regling said. “It’s meaningless.”
Regling said the calculations - known as a debt-sustainability analysis - didn’t take sufficient account of the exceptionally good terms of Greece’s bailout. The euro zone’s loans come at very low interest rates and, on average, won’t have to be repaid for 30 years, he said. “When you add all of that up it’s a huge grant element. And that’s economically the equivalent of a haircut.” Regling added, “I think people have to do their homework and look at it that way. That can go a long way.”
There were other comments earlier this week, by European Central Bank President Mario Draghi, who insisted that Greece’s debt was sustainable. The German Finance Minister Wolfgang Schäuble has said that Athens may need new loans but has ruled out debt forgiveness.
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Source: Bloomberg / Reuters / Wall Street Journal
