Euro zone mulls new ways to cut Greek debt mountain

Sat Oct 13, 2012 3:25pm EDT
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By Jan Strupczewski

TOKYO (Reuters) - Euro zone officials are considering new ways to reduce Greece's huge debts because delays to reforms by Athens and continued recession have put the target of a debt to GDP ratio of 120 percent in 2020 out of reach, euro zone officials said.

A Greek debt sustainability analysis prepared by the International Monetary Fund, the European Central Bank and the European Commission in March forecast Greek debt would rise to 164 percent of GDP in 2013 from around 160 percent in 2012 under a baseline scenario assuming the Greek economy would stop contracting next year.

But Greece now expects its economy to shrink by 3.8 percent in 2013, its sixth consecutive year of contraction, boosting its debt ratio to 179.3 percent.

"At the moment it looks like Greece's debt level will rise to well above the target of 120 percent of GDP by 2020," ECB Executive Board member Joerg Asmussen told the Sueddeutsche Zeitung newspaper.

To bring it back towards the desired level in 2020, Greece could organize voluntary buy-backs of its bonds, he said.

The country is currently locked in talks with its lenders on a further set of cuts and reforms in order to obtain a new loan tranche. A deal should be reached by the time EU leaders meet on October 18-19, Greek Prime Minister Antonis Samaras said in an interview with the Sunday edition of daily Kathimerini.

Money for buy-backs could not come from the ECB, but it could be lent by the European Stability Mechanism, for example, one senior euro zone official, who was in Tokyo for the weekend meetings of the International Monetary Fund and World Bank, said.

Because Greek bonds trade at very deep discounts, one euro of money borrowed from the ESM, the euro zone's permanent bailout fund, could reduce Greek debt by 1.5 euros, the official said.   Continued...

European Central Bank (ECB) Executive Board member Joerg Asmussen smiles during an interview with Reuters in Berlin June 19, 2012. REUTERS/Pawel Kopczynski