Greece may have blown best hope of debt deal

Sun Apr 12, 2015 4:05am EDT
 
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By Paul Taylor

BRUSSELS (Reuters) - Even if it survives the next three months teetering on the brink of bankruptcy, Greece may have blown its best chance of a long-term debt deal by alienating its euro zone partners when it most needed their support.

Prime Minister Alexis Tsipras' leftist-led government has so thoroughly shattered creditors' trust that solutions which might have been on offer a few weeks ago now seem out of reach.

With a public debt equivalent to 175 percent of economic output and an economy struggling to pull out of a six-year depression, Athens needs all the goodwill it can summon to ease the burden. It owes 80 percent of that debt to official lenders after private bondholders took a hefty writedown in 2012.

Since outright debt forgiveness is politically impossible, the next best solution would be for Greece to pay off its expensive IMF loans early, redeem bonds held by the European Central Bank and extend the maturity of loans from euro zone governments to secure lower interest rates for years to come.

"This step would save Greece's budget billions of euros, while reforming the Troika arrangement, eliminating the IMF's and the ECB's financial exposure to Greece," said Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics, who advocates such an arrangement.

It would lower the effective interest rate on Greek debt to less than 2 percent, far less than Athens was paying before the euro zone debt crisis began in 2009, and radically reduce the principal amount to be repaid over the next decade, giving Greece fiscal breathing space to revive its economy.

And unlike ideas floated by Greek Finance Minister Yanis Varoufakis to swap euro zone loans for GDP-linked bonds and ECB holdings with perpetual bonds, paying out the IMF and the ECB early would be legal and supported by precedent.

But if the economics make sense for Greece, the politics no longer add up for its partners.   Continued...

 
Greek and EU flags are seen outside the Foreign Ministry in Athens March 12, 2015. REUTERS/Yannis Behrakis