ESM examines measures for Greek debt relief

The nine-page document, dated Aug. 10 and seen by The Wall Street Journal, was put together by the European Stability Mechanism, the Luxembourg-based eurozone bailout fund, and outlines different options to reduce Greece’s large debt load.

The paper focuses on three measures: extending the maturity of some of Greece’s loans, linking fixed debt repayments to the country’s gross domestic product and capping or deferring interest payments.

“These measures provide the necessary conditions for bringing debt service back to a sustainable path,” it says

The document doesn’t examine cutting the face value of the debt, an option ruled out by eurozone leaders in July.


The paper was distributed to the institutions overseeing the country’s bailout: the IMF, European Central Bank and the European Commission, but not to European governments.

It works under the assumption that Greece’s annual gross financing needs—the money the country must raise to cover its deficit, interest payments and maturing debt—remain below 15% of GDP annually, a threshold the IMF has deemed sustainable. Until now, the key official measure of debt sustainability has been total debt as a proportion of gross domestic product, which the International Monetary Fund has projected would peak at close to 200%.

“This is a technical paper drafted by staff in August. At the time it was shared with institutions at a working level. The paper was not sent to member states and it was never discussed in the Eurogroup or the Eurogroup Working Group,” a spokesman for the ESM said, referring respectively to meetings of eurozone finance ministers and their aides.

As four months have passed since the ESM document was distributed, some of its assumptions on Greece’s economy and the size of its bailout must be updated before debt negotiations start, eurozone officials say. The country’s recession this year is forecast to be shallower than expected, while the recapitalization of the country’s largest banks required significantly less money than the €25 billion ($27.6 billion) originally set aside for this purpose.

Still, officials say the options outlined in the document remain a possible basis for discussions, shedding some light on the issues set to dominate debt-relief negotiations in the coming months. Talks on debt have been contingent on the country concluding the first review of its bailout, now expected in early 2016.

The ESM paper focuses on options for debt relief through debt re-profiling—pushing debt and interest repayment schedules out into the future. While this wouldn’t reduce the amount of the debt, it would immediately improve Athens’s ability to repay. economy is doing better and less if it isn’t.

More specifically, the paper looks at fixing amortizations—the scheduled repayments of debt—to 1% of GDP for 2023-2033 and 1.5% from 2034-2044. Any outstanding debt would then be split into equal tranches to be repaid starting in 2044.

It also suggests that an existing deferral to 2022 of the interest Greece has to pay on some of its loans could be partially extended for another 10 years, while interest payments get fixed at 2% for the decade of 2023-2033. Any leftover interest would then be paid in equal installments from 2044 on.

Given the assumptions the paper makes on the state of the economy, the debt-relief measures it outlines could reduce the net present value of Greece’s debt by 52.5%, it says, with 6.1% coming from extending maturities.

The paper also addresses concerns echoed by many European officials, that if Greece is granted debt restructuring from the start, it may get a free pass to run deficits in the future and slow its reform pace.

“The effectiveness of any debt re-profiling measures to support debt sustainability will depend critically on the ability and willingness of Greek authorities to pursue a prudent fiscal policy path, and to implement the structural reforms needed to produce sustainable growth,” the paper says.

It cautions that “strong and lasting conditionality related to debt relief measures could undermine their credibility and effectiveness,” and instead suggests that part of the debt relief could be granted upfront while part of it would be tied to longer-term monitoring of Greece’s adherence to fiscal rules and implementation of structural reforms.