A new bailout to rescue Greece will add to its mountain of debt but a restructure could be in the cards.
The deal offering $96 billion over three years needs to be approved by lawmakers in Greece and other parliaments in the eurozone.
It leaves the door open for debt restructuring — such as more time to pay — but stands firm against wiping any of the debt slate clean.
Greece already enjoys generous terms on the 312 billion euros ($343.6 billion) it owes Europe and other international creditors. It’s subject to varying terms on its schedule of loans and lenders. But none, economists say, are particularly onerous.
So what might a restructure look like?
Berenberg economist Holger Schmieding said Greece currently pays around 1.7% interest on its debt. That rate is even lower when other concessions are considered.
For example, the European Central Bank refunds to Greece the profits it makes on Greek bonds, provided the country meets other creditor conditions. Schmieding said that brings the actual interest rate Greece pays on its debt to just 1.5%.
With low rates and interest rate holidays, Greece’s debt servicing costs are well below many other developed nations.
Here’s another calculation: Oxford Economics chief European economist James Nixon said last year Greece shelled out about 7.6 billion euros ($8.3 billion) in interest payments, or around 4% of GDP.
“That’s a relatively low number,” Nixon said, “And a lower interest burden than faced by most eurozone countries.”
Are more reductions feasible?
Nixon said no. He said there isn’t “much mileage” on interest rates and little scope to reduce them further.
The country also has plenty of time to pay.
Back in 2012 a big chunk of Greece’s debt was restructured, pushing out the maturities on loans, providing more grace periods for interest repayments and reducing rates.
Grace periods could be stretched even further. The International Monetary Fund said one option to address Greece’s worsening debt profile is to push grace periods out “dramatically,” by 30 years on the entire stock of its debt. But what it really needs is relief.
“Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far,” the IMF wrote in a report out Tuesday.
The IMF said the country’s debt has become “highly unsustainable” and forecasts it will peak at close to 200% of GDP in the next two years.
Right now Greece’s debt-to-GDP ratio is 172%. By contrast, the U.S. stands at about 88%, and Germany’s debt-to-GDP ratio is 53%.
Calls for debt relief have long been rejected by Europe and the bailout deal headed before parliaments explicitly states “haircuts on the debt cannot be undertaken.”
Capital Economics chief European economist Jonathan Loynes said Greece could be granted additional extensions and more time to pay its debts. But as the IMF argues, that won’t help move the country’s debt down to a sustainable level — generally seen at about 100% of GDP.
“Fiddling around at the edges is not going to do the job,” Loynes said. “You need substantial write-downs to get debt back to sustainable levels.”