A Greek proposal to swap government debt for bonds with interest payments linked to economic growth got a sceptical reception from eurozone officials yesterday.
Greece’s new Finance Minister, Yanis Varoufakis, on Monday floated the idea that Greek bonds held by the European Central Bank and part of the debt owed to eurozone governments – €53 billion of bilateral loans – could be swapped for either growth-linked, or perpetual bonds.
It was unclear if the idea entailed dropping demands for an official debt write-off or not. Varoufakis said Athens stood by its debt reduction demand but a source said the demand for a debt “haircut” was no longer there.
Either way, eurozone officials involved in negotiating financial assistance for Greece gave the debt swap a cool reception.
“We need more details. But first reactions are rather sceptical,” one eurozone official said. “There is a worry that it’s just a new trick how to do a haircut.”
Officials said there was no appetite for a restructuring of Greek debt held by the eurozone, now €195 billion.
The European Central Bank and eurozone national central banks that form part of the ECB system hold roughly another €50 billion.
“Varoufakis is intelligent, but he is underestimating the problems, and the constitutional leeway of the ECB and eurozone governments,” a second eurozone official said.
I don’t see much appetite for it
Apart from legal issues, the proposed debt swap posed several practical problems.
“With the caveat that we are lacking the details we’d need to assess the idea properly, I don’t see much appetite for it, and possibly considerable practical difficulties,” a third eurozone official said.
“For starters, what would be the threshold growth rate used for the growth-linked bonds? Would you base it on forecasts – presumably not – or actual data? What if the figure is later revised up or down, as can happen?” the official said.
A German DIW think-tank paper supported growth-linked bonds because they would lower the likelihood of a Greek default, stabilise the debt ratio even if growth was weak, provide an incentive for reforms and, if growth took off, they would make more money for the eurozone lenders.
But eurozone officials said the ECB was unlikely to agree to hold growth-linked or perpetual Greek bonds – paper that never matures but pays a relatively high annual interest – and that the financial conditions Greece now had from the eurozone bailout fund, the EFSF, could hardly be improved on.
Greece has a grace period on the repayment and servicing of its loans from the eurozone until 2023 and the average maturity of the loans already is 32 years.