Greece is pushing its creditors to fix the borrowing costs on its massive debt pile at current low levels in a bid to save millions of euros in coupon payments if interest rates rise.
The priority is to fix the repayments on the largest chunk of the €228 billion owed to official creditors from its three financial rescue packages. The €162.7 billion is owed to the European Financial Stability Facility and the European Stability Mechanism, created by eurozone governments to help countries in difficulty during Europe’s debt crisis, a government official said.
The EFSF and ESM borrow money to lend to Greece. Because they plan to borrow the money over a long period of time and pass on the costs to Greece, the government is worried that the repayments will rise if rates go up as expected.
The government would like to swap it for fixed rate debt and has consulted primary dealers in the bond market to get an idea of the kind of rate it could expect, three dealers said. It hopes that this information can be used in talks with eurozone officials on December 5, they said.
The government official told Reuters that lowering the floating rate portion was necessary to help get the debt on a sustainable path.
“Swapping a portion of floating-rate debt into fixed would help avoid a potential vicious cycle if interest rates rise in the longer term,” he said.
“If interest rate risk is not neutralised we could face a Sisyphus-type situation (on debt repayments).”
Included in the €162.7 billion is €31 billion of EFSF floating rate notes that were given to Greek banks.
Greece is trying to persuade officials to let it to swap these for new fixed-rate, longer maturity paper.
“This way we could lock this amount to a 30-year fixed rate,” the official said.
Greece also has €57 billion in outstanding bonds and €14.5 billion of outstanding T-bills
In the medium term, the government also hopes to renegotiate a further €52.9 billion of the official debt. This is bilateral debt owed to eurozone creditors and was the first tranche of the rescue package. That debt also has a floating rate.
The rest of the €228 billion, about €13 billion, is owed to the International Monetary Fund.
The official also said Greece was hoping that the remaining funds in the third ESM bailout would be issued “as much as possible longer maturity, fixed rate paper.”
Greece also has €57 billion in outstanding bonds and €14.5 billion of outstanding T-bills. These are traded on financial markets but they already carry a fixed interest rate.
Three primary dealers of Greek debt told Reuters that government officials had been asking them about the cost of swapping floating rate notes for fixed rate notes in the derivatives market.
“It may sound like wishful thinking from Greece, but the issue here is debt sustainability. If it becomes impossible for Greece to pay back its debt, the whole thing falls apart,” one primary dealer said.
The ESM and EFSF, created in the wake of the eurozone debt crisis, are guaranteed and backed by eurozone members and fund bailouts by issuing bonds themselves, and they pass their own borrowing costs to their debtors.
The ESM has been tasked by eurozone finance ministers with coming up with proposals for debt relief and will present its recommendations at the December 5 Eurogroup meeting.
“We are looking at all EFSF and ESM assets related to Greece. ESM managing director Klaus Regling aims at presenting concrete proposals to the euro area finance ministers at their meeting in December,” an ESM spokesman said.
Greece has the backing of the International Monetary Fund: it recommended in May that EU authorities fix all of the borrowing costs at current levels.
If this is applied, along with two other measures recommended by the IMF – extending the maturity of the debt and deferring payments – it would reduce Greece’s debt by 53 per cent of GDP by 2040 and 151 per cent by 2060, the fund has said.
However, the IMF has acknowledged the political difficulty of implementing these.
“This would clearly be highly controversial among member states in view of the constraints, political and legal, on such commitments within the currency union,” the IMF said in a report analysing Greece’s debt sustainability.
As Europe’s largest economy, Germany has the most exposure to ESM/ESF and bilateral debts. Mindful of criticism from voters at home, the government also took a tough line with eurozone countries in financial difficulty during the debt crisis.
Finance Minister Wolfgang Schaeuble restated his opposition to debt relief for Greece last week.