Brussels, 15/05/2014 (Agence Europe) - Reducing the Greek debt burden by extending loan maturity or reducing interest rates “could be seen as a loss” for creditor countries, Daniel Kenz, an analyst at Germany's DZ Bank, told EUROPE on Thursday 15 May. Lenz is the joint author of research published the same day into the impact of these forms of reduction of the Greek debt burden, if they were put into practice. The research is published by German newspaper Süddeutsche Zeitung, which estimates that reducing the Greek debt burden would cost German taxpayers €22 billion.
Süddeutsche Zeitung says that reducing the Greek debt in either of these ways would cost Germany dear, even without a writedown, with the only benefit being a reduction in the political cost. “It's a question of interpretation”, explains Lenz, pointing out that his study did not try to measure the potential impact on the indebted countries. He said that it was a question of reduced interest rate receipts rather than losses as such, as in the case of a writedown.
The Süddeutsche Zeitung quotes the research, pointing out that Greek debt stood at €316.4 billion at the end of 2013, €213.7 bn of it from bailout loans from the eurozone and International Monetary Fund. The newspaper says that Germany's share of the loans to Greece is €55 billion. If an extension in the repayment term from 24 to 50 years and a reduction in the interest rate are taken together, the Süddeutsche Zeitung says the present value benefit for Greece would amount to approximately €78.2 bn or nearly 40% of the Greek debt and a “disadvantage” to the German taxpayer of €22 billion, a figure the newspaper says is subject to interpretation, but will be over €10 billion.
Lenz says the study shows that going for a haircut or reducing the interest rates and extending maturities “makes no difference from an economic point of view” and in present value terms. “If euro swap rates are used as discount factors, on the basis of the assumptions made, the present value of Greek nominal bailout debt, i.e. excluding interest payments, would be reduced from €121.9 bn to €65.2 bn. This would equate to a reduction of €56.7 bn. In turn, the present value of current interest payments would rise because Greece would no longer have to pay loan interest for the next 24 years but for the next 50 years and consequently would pay more interest over a longer period than before. Since the assumption is that Greece would not repay its liabilities on maturity in 24 years but would have to reschedule, today's loan interest rates would have to be considered in relation to the market conditions that Greece would have to pay in the future.” The study says: “An extension to its repayment terms would probably not yet provide a sustainable solution to the Greek debt problem, but it is likely that the market would rate Greece's credit-worthiness far more positively than it does at present. Interest in short and medium-term Greek maturities, in particular, is likely to increase and the risk premium on markets in relation to other countries is likely to fall. However, a positive trend in spreads presupposes that Greece adheres to its present reformist course and increasing political risks do not overwhelm the positive effects of debt relief.” The current debt/GDP ratio that the troika and IMF are so keen on, when it comes to measuring the impact of the Greek programme, would not be affected. Lenz says “the ratio of indebtedness doesn't reflect the real picture - present value is more important”, a view shared in Athens.
DZ Bank says it could make sense from a Greek government's point of view to keep up the discussions on debt relief because they're not “out of the woods”, explains Lenz.
The DZ Bank study includes the IMF loans of €26 bn in its calculations, but Greece accepts that the IMF cannot be expected to reduce this debt.
Lenz says that if the IMF did not accept an extension on its own loans they could, in theory, be transferred to the EU at some point in future. Otherwise the present value effect for Greece of the measures described in the research would be somewhat smaller.
The eurozone wants a full picture of the situation before launching talks on its promise in 2012 to reduce the Greek debt burden. The health of Greek banks will play a big role because it will determine whether there is any of the earmarked money for the banks left over. Earlier this week, credit rating agency Fitch described Greek banks' asset quality as “low”, and says capital levels are still “vulnerable to shocks”, due to the high levels of non-performing loans. The bank assessments being carried out at EU level will provide a clearer picture. Greece says the eurozone debt reduction would no longer justify a primary budget surplus requirement of 4.5% for 2016 to 2020 so Greek media say the country may request adjustments to the budget targets. (EL)