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Tuesday, June 14, 2016

IMF Departure - Solution to Greece's Debt Sustainability?

Two very interesting articles were published within the span of a few days recently.

In "IMF go home!", Daniel Gros sheds light on Greece's interest cost and maturities profile. As I have argued on many occasions in this blog, from those two standpoints, the IMF is part of the problem and not part of the solution: the interest cost of IMF funding is almost 300 basis points higher than that of the Eurosystem funding (3,9% versus 1%); and the maturity profile of 5-7 years on IMF funding compares with up to 50 years on Eurosystem funding.

The IMF has super senior status to begin with. By insisting on major debt relief on the part of the Eurosystem, the IMF is essentially improving the quality of its super senior loans to Greece. When the IMF makes debt sustainability analyses justifying major debt relief, that obviously constitutes a conflict of interest.

The other interesting article was published by Yiannis Stournaras, the Governor of the Bank of Greece ("Greece needs a new deal with its European partners"). In it, Stournaras outlines the kind of debt relief which would be sufficient for Greece to get back on track. And here is the surprise: Stournaras argues that an extension of loan maturities by 20 years and repayment of capitalized deferred interest also over a period of 20 years, combined with a 2% primary surplus requirement, would do the trick.

Really? I mean the terms which Stournaras is suggesting may be some form of debt easing but they certainly don't represent significant debt relief. Significant debt relief, in my opinion, would be to have a 10-20 years maturities grace period on most of the debt and a reduction of interest rates to close to zero for the next 20 years, at least. One could describe this in different terms: free Greece of refinancing requirements for the next 10-20 years and limit the interest expense to about 1-2% of GDP. Even such a far more aggressive proposal than the one of Stournaras should be fully acceptable to the Eurosystem: they incur no write-off's of principal and they don't even incur funding losses at today's low interest rates. Essentially, this would be "debt relief free of charge for the creditors".

I rest my case!

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