Greek Debt Deal Explained

By Matina Stevis

Disclaimer: this headline is meant to make you click on it but the blog-post may not deliver all it promises. The reason is that, after dozens of hours of tough negotiations by finance ministers that finished early on Tuesday, the hotly-anticipated deal to cut Greece’s debt and give the country the aid it’s been waiting for since June is as clear as mud.

Here we take you through what we do know and highlight what we don’t, especially in view of the latest numbers crunched by debt experts from the troika of the European Commission, the European Central Bank and the International Monetary Fund, that our Gabriele Steinhauser got her hands on later on Tuesday.

The agreed goal is to bring Greece’s debt down to 124% of its economic output in 2020 and “substantially below” 110% in 2022. An exhausted press corps in Brussels was handed out a vague statement at 2 am CET Tuesday morning that left the impression that the measures agreed by finance ministers would lead to Greece meeting those targets.

However, the numbers that emerged later on Tuesday show that the measures announced immediately after the meeting will get Greece’s debt down only to 126.6% of Gross Domestic Program in 2020 and 115% in 2022.

It’s now clear that to cover the distance between 126.6% and the 124% GDP target, “euro-area member states will consider further measures and assistance, including inter alia… further interest rate reduction of the Greek Loan facility,” as the statement mentions.

This effectively means that the IMF will have to show a great deal of good faith in the euro zone if it decides to stick to a revised debt-to-GDP ratio of 124% by 2020 in its debt assessments–if that’s what was really agreed Tuesday.  Some of the steps that will actually get Greek debt to that point are yet to be determined, much less agreed on.

As for the measures that are going ahead, we list them here, adding the dent they’re expected to make in Greece’s debt levels in 2020. The table combines Tuesday’s announcements with the details seen on the leaked document.

Part of the deal reached does help Greece to finance its debt. The extension of Greece’s bailout maturities by 15 years will give the country more time to repay its debt and make installments more manageable. The euro-zone bailout fund has also agreed to not collect interest payments until 2022, giving Greece a €44-billion worth breathing space over that period. That amount of interest payments that will accrue over the decade-long grace period will have to be repaid, but the country will have more time to spread those payments over.

A big question mark lingers over the debt-buyback operation. The table above –and other parts of it not shown here- indicate that the troika expects Greece’s debt to be cut by 11% of GDP in 2020 as the result of the exercise.

According to the table seen by Gabriele, Greece will need €9.6 billion to offer to private-sector Greek government bond-holders to entice them into giving up their holdings. The country will then repatriate the securities, effectively wiping them off its debt load.

One big question is the source of the €9.6 billion. German finance minister Wolfgang Schäuble said Tuesday that there would be no new loans for the buyback. He said that Greece could raise the funds from the combination reduced interest rates on existing loans, payments to Greece of profits made from the European Central Bank’s bond-buying program as well as through short-term loans, or treasury bills – pretty much the same steps that will be taken to reduce the overall debt load.

While the buyback seems to be a crucial part of the deal, even its architects don’t seem entirely convinced it’s going to work.  Christine Lagarde, the IMF’s Managing Director, told reporters in Brussels: “The debt buyback will obviously have to be completed in order for us to know the exact magnitude of the debt reduction that will result from that debt buyback.”

What if it doesn’t go according to plan? What if the debt reduction it achieves falls short of that 11% of  GDP in 2020? Mr. Schäuble indicated there was a plan B but offered no details.

Assuming it all goes according to plan, the Greek government will get €34.4 billion in aid–€23.8 billion of which to recapitalize the country’s parched banking sector–by December 13. The remaining €9.3 billion will trickle into the country over the course of the first quarter of 2013 in three chunks and under strict conditions.

By Dec. 13, the national parliaments of certain euro-zone countries that need to either debate or vote on the Greek deal should have done so–they include Germany, Finland, the Netherlands and Slovenia. The debt buyback operation is expected to be completed by the end of this year – though, this being a market operation, it could be more unpredictable than hoped.

While some things fell into place after Tuesday’s deal, there are still several unknown factors which can be summarized in three themes:

• How much debt relief will the debt buyback truly achieve?
• What exactly are the measures that the euro zone will take, if the buyback falls short of expectations and in order to reduce the debt by the additional 2.6 percentage points that will bring it to 124% of GDP in 2020 and then to below 110% by 2022?
• Did the agreement reached really rule out a write-down of the face value of Greek debt as some euro-zone governments argued? Somewhere between 2020 and 2022 targets a debt haircut may still be lurking.

Watch this space.

–Gabriele Steinhauser contributed to this blogpost.

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