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Regling proposal: ESM to buy part of Greece’s debt to the IMF, as EMS-loans have lower interest rates

It is certainly a revolutionary proposal that expected to raise sharp criticism in Germany. Managing Director of the European Stability Fund Klaus Regling has reportedly brought a controversial 2-page proposal to the Eurogroup meeting on Monday. In his proposal, Regling offers that the ESM buy part of Greek debt to the International Monetary Fund in order to avoid that the Greek “rescue” becomes very expensive for the EU countries should the Debt Relief proceeds.

According to conservative German daily DIE WELT that obtained Regling’s proposal, the list of options to reduce the Greek debt burden include:

  1. Extension of loan maturities and a cap in case that interest rates increase
  2. possibility that the Euro-partners buy a part of the Greek debt at the IMF

Background for this proposal is that:

Greece pays back older debts to the IMF with an interest rate of 3.5%.  Loan from the ESM were certainly much cheaper as the interest rate is below 1% – due to ECB rates policy. Through this option Greece could save a lot of money.

According to Die Welt, “Regling’s proposal is likely to meet with harsh criticism in Germany, then it would mean that the international burden-sharing balance in the Greek rescue program will be changed. Germany and the EU-partners would have to contribute more  for the Greek rescue program than before and that the IMF would have profit as it would have get rid of part of the Greek debt.”

With this revelation, now Schaeuble’s insistence to speak of  – and reject – a Greek “haircut” slowly starts to make sense.

PS this bitter Finance Minister of Germany would rather see his euro-partner Greece pay higher interest rates to the IMF so he enhance his argument on “Greece would be better outside the Eurozone” dogma as the debt-ridden country would proceed with national currency devaluation. As long as this does not happen, the only solution for Schauble is the permanent internal devaluation of the Greek incomes and lives.

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  1. Another win-win scenario from the Germans.

    First you threaten the Greeks by telling them that without IMF participation, the bailout program cannot continue. Then you tell them that to keep the IMF on board they have to agree to pass legislation that would allow for the IMF draconian conditions and you reassure them, probably privately and orally, that Europe would never implement these condition; that they are simply a facade to keep the IMF happy. The Greeks, like poor saps, accept these conditions (additional GDP reduction, reductions in pensions, automatic cuts, etc.) and when Europe has the Greek on paper and publicly agreeing to these conditions, you then present a “way” for the IMF to be bought out of the bailout that makes it impossible for any European country to agree to it. So they don’t and Greece is left holding the bag with the new cuts agreed to and the new process of automatic future cuts in place. If they don’t like it, their only option is to default and then you get to blame them for not implementing what they had accepted. It’s not Germany’s fault! It’s those damn Greeks who don’t respect agreements!

  2. Hold on, why not negative interest rates? Then Greece will make some money on that.