Opponents of Greek debt relief claim there will be an extra financial burden on Eurozone member states and their taxpayers. This is not true, says Eric Dor, Director of Economic Studies at IESEG School of Management in Lille, France.
Below Eric Dor’s position
Why a lengthening of the maturities of the Greek debt would not cost anything to the States of the euro area and their citizens
14 June 2017
There is a wrong but widespread idea in several countries, as for example in Germany, according to which a restructuring of the Greek debt, by lengthening the maturities, would be costly to the lender countries and their citizens. It is thus useful to explain why it is wrong.
The States of the euro area, like Germany or France, have borrowed the funds that they have lent to Greece. But Greece pays them higher interest rates than the interest rates at which these countries have borrowed. Extending the maturities of the loans, while keeping a small margin on the funding costs, would not cost anything to the States and their citizens.
Greece has been awarded the right to start paying interest states only in 2020. But this postponement of interest rates payments has been considered as additional loans to Greece. Thus Greece will later pay them with additional interest payments on them. It has not cost anything to the lenders. Postponing again the payment of interest rates, using this scheme, would not cost anything to the lending countries.
Loans of EFSF
With the guarantee of the States of the euro area, EFSF has borrowed on the markets the funds that it has lent to Greece. But Greece pays EFSF a slightly higher interest rate than the interest rate at which EFSF borrowed the funds. There is thus no cost to EFSF. The States of the euro area did not disburse anything. They are just exposed to the risk of being compelled to reimburse the creditors of EFSF if Greece defaults. But they receive fees paid by Greece for these guarantees. Extending the duration of this scheme would not cost anything to the States and their citizens, as long as Greece pays a higher interest rate than the funding cost of EFSF, and pays fees for the guarantees.
Greece has been awarded the right to start paying interest states only in 2023. The same comments as those concerning the bilateral loans apply.
Loans of ESM
ESM borrows on the markets the funds needed to award loans to Greece. But Greece pays ESM slightly higher interest rates than those at which ESM borrows. States of the euro area had to borrow the funds needed to pay their shares of capital in the ESM. But ESM pays dividends on this capital which is invested. Anyway ESM is a permanent structure. The capital paid in by States has to remain there permanently, whatever the duration of the relationship between Greece and ESM. Extending the maturities of the loans of ESM to Greece would not cost anything to the States of the euro area and their citizens
by Eric Dor
Director of Economic Studies at IESEG School of Management
PS I saw this ext in French. Upon request Eric Dor was so kind to translate it in English and submitted it to KTG. Much appreciated, Eric!