ESM: No debt relief if Greece achieves primary surplus of 3+% for 20 years

The Lord’s ways are known to be mysterious. But creditors’ ways are beyond any limit innovative. Especially when it comes to block any loan or any promised debt relief to indebted Greece. Despite the many projections and forecasts and prior actions, in the back of  creditors’ head, which is Wolfgang Schaeuble is the thought:

I do not intend to give anything to Greece, and if Greek economy is successful, why a debt relief, anyway?

The latest creative proposal comes from the eurozone bailout fund, the European Stability Mechanism. And it is very creative and impossible to implement.

“Greece will not need any debt relief from euro zone governments if it keeps its primary surplus above 3 percent of GDP for 20 years”, a confidential paper obtained by Reuters shows.

The paper was prepared for euro zone finance ministers and International Monetary Fund talks last Monday. That specific Eurogroup meeting that ended without an agreement due to diverging IMF and euro zone assumptions on future Greek growth and surpluses.

A group of euro zone finance ministers led by Germany’s Wolfgang Schaeuble insists that the issue of whether Greece needs debt relief can only be decided when the latest bailout expires in mid-2018. The IMF says the need for a bailout is already clear now.

The three scenarios according to ESM are:

Scenario A assumes no debt relief would be needed if Athens kept the primary surplus at or above 3.5 percent of gross domestic product until 2032 and above 3 percent until 2038.

Greece would have to keep its primary surplus at 3.5 percent until 2022 but could then lower it to around 2 percent until mid-2030s and to 1.5 percent by 2048, giving an average of 2.2 percent in 2023-2060.

The scenario says the maximum possible debt relief under consideration is an extension of average weighted loan maturities by 17.5 years from the current 32.5 years, with the last loans maturing in 2080. The ESM would also limit Greek loan repayments to 0.4 percent of Greek GDP until 2050 and cap the interest rate charged on the loans at 1 percent until 2050. The ESM would also buy back in 2019 the 13 billion euros that Greece owes the IMF. a

Scenario B is built on the IMF’s assumptions of average growth of 1 percent and a return to a primary surplus of 1.5 percent from 2023 after five years at 3.5 percent. This sees Greek debt rising from 2022 and reaching 226 percent in 2060.

Greek banks would then have to be recapitalized and the country’s gross financing needs would, in the late 2020s, be above the ceiling of 15 percent of GDP promised by euro zone ministers, reaching more than 50 percent in 2060.

To make Greek debt sustainable under the IMF assumptions, the euro zone would have to give Greece deeper debt relief than it conditionally offered in 2016 — something ministers reject.

Scenario C is a compromise between A and B, assuming average economic growth of 1.25 percent, a primary surplus of 3.5 percent until 2022, easing more gradually thereafter to averages 1.8 percent, rather than 2.2 percent in 2023-2060.

In May 2016, the euro zone promised to extend the maturities and grace periods on Greek loans so that Greece’s gross financing needs are below 15 percent of GDP after 2018 for the medium term, and below 20 percent of GDP later.

Full ESM scenarios in Reuters.

I am sure, if the ESM experts had time to make new calculations and theoretical assumptions and play with their kindergarten abacus for a couple of more days, they would produce also Scenario D, E, F, G and H. Actually, they have time until June 15 when the next crucial Eurogroup takes place.

No, I don’t believe it plays any serious role that ESM chief is German. Does it?