The plan may include pushing back Greece’s budget targets, easing the terms of emergency loans in its 110 billion euro international bailout, giving it additional aid, and a relatively mild restructuring of Greek sovereign debt held by private investors, official sources and analysts say.
Speaking after the gathering in Luxembourg, a meeting that senior finance officials in many other euro zone countries did not know was taking place, Jean-Claude Juncker, chairman of the zone’s finance ministers, said there was a consensus that Greece needed a new plan.
“We think that Greece does need a further adjustment program,” he said, after meeting with the finance ministers of Germany, France, Italy, Spain and Greece as well as European Union monetary affairs commissioner Olli Rehn and European Central Bank President Jean-Claude Trichet.
“This has to be discussed in detail and will be taken up at the next Eurogroup meeting on May 16,” he said, referring to a conference of finance ministers of all 17 euro zone states.
Juncker and the Greek government strongly denied a German media report that Friday’s meeting was called to discuss the possibility of Greece leaving the euro zone or the idea of restructuring its bonds.
But his statement was an admission that Greece’s current economic plan, under which it is trying to hit annual targets for cutting debt levels that were specified in its bailout agreement with the European Union and the International Monetary Fund last May, simply is not working.
Greece’s austerity measures have kept it in such a deep recession that it has been unable to hit fiscal targets. Its budget deficit was 10.5 percent of gross domestic product last year, way off the 8.1 percent target; Athens is supposed to reach 2.6 percent in 2014, which would require further painful steps. At about 327 billion euros ($470 billion), its total debt is nearly 150 percent of GDP and still growing.
A new Greek economic plan could push back the deadlines to hit budget targets, giving the economy more room to grow out of trouble. There would be a precedent for this; an international bailout plan announced for Portugal this week involved easing its fiscal targets.
Euro zone official sources said a new plan would probably also involve softening the terms on the 80 billion euro portion of emergency loans extended by the EU under the bailout.
The maturities of the loans have already been extended once, to 7.5 years from three years; they could be extended further, while the interest rate of about four percent now paid on them might be cut.
That is something which Greek Finance Minister George Papaconstantinou has pushed for and which some European politicians, including a senior official in German Chancellor Angela Merkel’s coalition, have said would be logical.
An apparent flaw in Greece’s current economic plan is that it envisions Athens returning to the markets to borrow money from next year; Greek bond yields are still sky-high and the cost of insuring its debt is at a record high, so many investors doubt this will be possible at a reasonable cost for Greece.
Greece may therefore have to be given extra money that lets it stay independent of the markets for longer. One option would be for the euro zone’s bailout fund, the European Financial Stability Facility, to buy Greek government bonds upon issue; planned reforms to the EFSF would enable it to take such action.
In an interview with Italian newspaper La Stampa published on Saturday, Papaconstantinou said he still believed Greece could return to the markets next year but if not, the EFSF might fill the gap.
Such steps could help Greece weather some of its immediate financing problems but they would do little to address its long-term challenge: reducing the size of its debt mountain. Some form of restructuring for Greek bonds may therefore be inevitable at some stage.
David Mackie, an analyst with JP Morgan Chase in London, argued in a report on Friday that the likelihood of a Greek debt restructuring was rising, though it was not inevitable.
“The motivation for such a move would be to limit the financial exposure of the rest of the region to Greece and to incentivise the Greek government to stick to the current objective of generating a sizable primary surplus by 2014,” he wrote.
“If it were to happen, it would likely involve an extension of the maturity of the market debt that is due to mature in the next few years.” He added: “We are not yet ready to forecast that a debt restructuring will occur this year.”
Greek and European officials, wary of panicking the markets, insist a restructuring is not on the cards, but privately EU officials are increasingly open about the possibility.
To reduce the impact on Greek and European banks, any restructuring might exclude an outright cut in the principal paid on the bonds, known as a “haircut.” But an extension of maturities on the bonds would be relatively palatable.
A large part of Greece’s funding is at the short end of the curve; that is unsustainable so the debt should be swapped for longer-dated paper, said a senior EU official, speaking on condition of anonymity.
Another possibility, he said, would be to offer investors bonds with different structures in exchange for their current holdings. The new bonds might for example incorporate growth targets, so that if Greece achieved a certain GDP growth rate over a fixed time, the bonds would pay out a higher coupon.
“In that way, bondholders might be incentivised to trade in their old debt for something that could be more advantageous to them, without necessarily taking a haircut,” he said. Such a voluntary scheme, based on incentives, could have much less of a negative impact on markets than an obligatory restructuring.
A possible model for Greece is Uruguay, which in 2003 successfully “reprofiled” its debt, largely without haircuts.
Papaconstantinou, the Greek finance minister, has said one reason why a debt restructuring is out of the question is that it would cut Greece out of international markets “for 10-15 years.” But in Uruguay’s case, the country was able to return to the market 30 days after it restructured.
