by Zsolt Darvas and Pia Hüttl
January 9, 2015
The Greek debt reduction issue has been put back on the table as the 25 January 2015 parliamentary snap elections are approaching. Already in November 2012, Eurogroup conclusions stated that “Member states will consider further measures and assistance … if necessary, for achieving a further credible and sustainable reduction of Greek debt-to-GDP ratio, when Greece reaches an annual primary surplus, as envisaged in the current MoU, conditional on full implementation of all conditions contained in the programme.” Since Greece achieved a primary surplus of 2.7 percent of GDP in 2014 (which is expected to increase further in 2015), and there are uncertainties related to the future debt trajectory of Greece, the Eurogroup could consider further measures, irrespective of which party will win the elections, as long as a comprehensive agreement on fiscal, structural and economic policies can be reached between the Troika and the new Greek government.
European lenders have already made several concessions to help Greece service its debt, such as lowering the interest rate that Greece has to pay, extending the maturities of loans, passing on to Greece the profits made by the ECB and national central banks on their Greek government bond holdings and deferring interest payments to the European Financial Stability Facility (EFSF) loans by 10 years. Contrary to many press commentaries claiming that European lenders have already made losses on their loans to Greece, this has not yet been the case: with the concessions, so far only the profits of euro-area partners have been reduced.
So what options could be considered to support public debt sustainability in Greece, which would not lead to a direct loss for European lenders? In this blog post we will try to answer this question and calculate the net present value gains for Greece.
While we conclude that there are such options, a reduction in the net present value of debt servicing costs does not mean that more money is available now for Greece to spend. The reduction means that future debt servicing costs are reduced compared to the current baseline during the next decades and, therefore, Greece would have to spend less on financing its debt in the future.