IMF urges fixed rates, longer grace period, maturities for Greece

The International Monetary Fund (IMF) would like euro zone countries to extend the grace period on all their loans to Greece until 2040 and their maturities to 2080 with a fixed interest rate until 2045, a confidential IMF document said.

The document, entitled “Greece: Debt Sustainability Summary Note” is the IMF’s input into a discussion on how to restructure Greek debt to make its servicing manageable for Athens and not too big a burden on the economy.

“The first key objective is to maintain gross financing needs well within the 15-20 percent of GDP thresholds… throughout the projection period,” the document, seen by Reuters said. The projections go as far as 2060.

“The second objective is to maintain the debt ratio on a downward path,” the document said.

To achieve that, the IMF proposes that euro zone countries, which provided Greece with three bailouts so far, extend the grace period on all their loans, meaning no payment of interest or principal, until 2040.

This would mean extending the existing grace period on the loans from the first Greek bailout by 20 years, the second bailout by 17 years and the latest bailout by up to 6 years.

“This is expected to reduce amortisation payments by about 5 percent of GDP during 2020-2040 (from 13 to 8 percent of GDP),” the document said.

Maturities of all loans from all bailouts should be extended to 2080, which would mean 40 more years for the first bailout loans, 24 more years for the second bailout lending and 20 more years for loans from the latest program.

“This will help keep gross financing needs below 20 percent by 2060,” the IMF document said.

In possibly the most controversial part of the proposal, the IMF said that all these details should be agreed now, even though the deal could include conditions linked to the delivery of promised reforms under the current program.

A group of euro zone countries led by Germany opposes making detailed promises now, fearing they would lose all leverage over Greece, which has failed to deliver on many of the commitments in the past.

“The details of the debt relief package would need to be agreed upfront,” the IMF said.

“The delivery will need to be comprised of an upfront component and a conditional component based on policy implementation (at each end-year review),” the IMF said.

“All relief contingent on broad policy implementation will need to be delivered by the end of the program period, in line with the Fund’s objective that the country should not be dependent on financial assistance post program,” it said.

The document said the best combination would be to fix Greece’s interest rates now, to take advantage of the currently low rates.

At the end of each year of the current bailout, the euro zone could restructure one third of all its loans to Greece if Athens delivers on all the promised reforms.

In 2018, when the program runs out, the euro zone could link further debt relief to developments in Greek economic growth, but not to further reforms, the document said.

Source: Reuters