IMF’s Lagarde Says Restructuring Should Suffice for Greek Debt

29 Aug 2015 | Author: | No comments yet »

Greece’s Debt-Reduction Red Herring.

Greece’s third bailout program could underpin a swift recovery in the country, provided of course that the hastily scheduled election in September does not derail the program once more.

European Stability Mechanism Managing Director Klaus Regling said on Thursday that he expects the International Monetary Fund to participate in the third Greek bailout bringing as much as €16 billion ($US18.11 billion.) Mr Regling said he is optimistic about the IMF’s participation in the €86 billion aid package after the fund accepted the European model on how to calculate debt sustainability, which looks at Greece’s gross refinancing needs instead of the overall debt level. The fund has said Greece’s debt level is unsustainable and requires “significant debt relief, well beyond what has been considered so far” by eurozone governments. Instead, creditors will likely talk about extending maturities on Greek debt, awarding interest deferrals on Greek debt and discuss transferring central banks’ profits from their holdings of Greek government bonds to Greece.

The aid package in form of loans requires Athens to implement tough public spending cuts, tax increases and broader market-oriented economic overhauls. Alexis Tsipras resigned as Greek prime minister last week and the country is expected to enter the official pre-election period later Thursday for the second set of snap elections this year, after opposition parties failed to assemble a coalition government in parliament. In economic terms, therefore, it is simply not true that the debt burden is “unbearable.” The new bailout program contains additional effective debt reduction by using €50 billion to refinance existing debt through loans with much longer maturities—probably 32.5 years on average—at minimal interest rates and with substantial grace periods before the first payments are due. At the beginning of the crisis, especially before the 2012 haircut, foreign and Greek banks benefited from the international bailouts that allowed the Greek government to continue servicing its debt. The ECB’s liquidity assistance has allowed Greeks to continue to invest abroad and import goods, despite the increasingly precarious solvency of Greek banks.

If the debt is cut now—before the creditors have proof that this time Greece is serious about reform—the pressure on Prime Minister Alexis Tsipras to implement reforms will disappear. Other eurozone countries such as Spain, Ireland and Portugal that have adopted reforms and are growing healthily as a result provide ample proof for that.

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