Greece: Debt relief, what to expect?

Support for debt relief measures has increased in the past few months. Debt
relief measures are not new; they were initially promised by the Eurogroup several years
ago (but never fully materialised), while the Tsipras government had been asking for them
since the beginning of its mandate, supported by the IMF. However, there has recently
been a renewed impulse coming from various parts of the euro area, now that the
programme is ending positively.
Even Germany, which has historically been more focused on Greek reforms rather than
debt relief measures, has recently been more inclined towards the idea. Nevertheless,
expectations over the magnitude of debt relief measures vary widely.
France, the EC and the IMF are pushing for stronger debt relief measures, as
soon as possible. This scenario would reduce uncertainty on Greece’s repayment
capacity and open up a virtuous circle; whereby the country could regain its IG status and
be part of QE or ECB balance sheet re-investments by the end-2018. A scenario which
we favour but doubt would happen if Germany keeps arguing against it.
Germany is likely to oppose significant and immediate debt relief measures.
Although the new finance minister may share a more liberal approach on Greece, he will
likely be bound by other political parties in the coalition. As such, Greece could be granted
only limited and conditional debt relief, in a step-by-step approach – which would continue
to postpone Greece’s return to normality.
In the end the Greek debt will become “sustainable”, in our view, but depending on the
magnitude of the relief measures the process will take more or less time. In the
“German” version, debt relief measures would be spread over a longer period and be
attached with more conditions. In the EC/IMF/French approach, a significant set of debt
relief measures would be implemented by August (although also attached to certain
conditions), and accelerate the path towards debt sustainability. In the more careful
German approach, a virtuous circle would only be triggered later, progressively – which
could lead to persistent economic and political uncertainty, in our view. Overall and
regardless of the timing we continue to think the country won’t be left to its own devices.

Technical work has already started on new debt relief measures, and although the
details are not yet known we expect the debt relief measures to focus on:
1) A further lowering of the interest rate risk – capping interest repayments and/or
linking them to economic performance;
2) further extension of the debt maturity, which is already the longest in the EA
(Figure 15);
3) linking debt relief measures to economic performance - an innovation from the
past. If confirmed this set up would allow tailored interest rate repayments and
maturity extension based on the country’s economic situation. A positive for
Greece, in our view, as it would support the country in times of economic
downturn by limiting debt repayments.
Nominal haircuts on the stock of debt will not be part of the package. The EU
holds more than 70% of the Greek public debt (Figure 16), with Germany being its
largest creditor. ESM’s Klaus Regling has confirmed that requiring investors to take a
nominal haircut, accepting outright losses on the value of government debt, would not be
part of any restructuring plan.
The IMF and EA countries should reach an agreement on debt relief measures
Thursday. Poul Thomsen, IMF director for Europe, said in an interview “we really need
an agreement at the Eurogroup (…) time is running out”. So far Greece has only received
money from the ESM, as the IMF refused to disburse any loans before debt relief
measures had been agreed. If on Thursday there is a deal, the IMF will re-active its
programme. More than the amounts at play (less than €2bn), the participation of the IMF
would send a positive signal of confidence in the country to markets, we believe.