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Publish Date : 27-Nov-2012

Eurozone finance ministers and the International Monetary Fund will seek to unfreeze the second bailout package for Greece on Monday, but they first need to agree if some of the official loans to Athens might eventually be forgiven to cut Greek debt.

Eurozone ministers and their deputies have held numerous meetings and conference calls over the last two weeks to decide how Greek debt, seen at almost 190 per cent of GDP next year, could be cut to a more sustainable 120 per cent in 8-10 years.

Without agreement on how to reduce the debt, eurozone ministers and the IMF do not want to resume payments of loan tranches to Athens - even though Greece has met all the conditions - because they have no guarantee on whether the need for emergency financing will ever end.

The key question is: Can Greek debt become sustainable without the eurozone writing off some of the loans to Athens?

So far, the options for debt reduction under consideration include reducing interest on already extended bilateral loans to Greece from the current 150 basis points above financing costs.

How much lower is not yet decided - France and Italy would like to reduce the rate to 30 basis points (bps), while Germany and some other countries insist on a 90 bps margin.

Another option, which could cut Greek debt by almost 17 per cent of GDP, is to defer interest payments on loans to Greece from the EFSF, a temporary bailout fund, by 10 years.

The European Central Bank could forego profits on its Greek bond portfolio, bought at a deep discount, cutting the debt pile by a further 4.6 per cent by 2020, a document prepared for the ministers\' talks last week showed.

Not all eurozone central banks are prepared to forego their profits, however, the German Bundesbank among them.

Greece could also buy back its privately-held bonds on the market at a deep discount, with gains from the operation depending on the scope and price.

But the preparatory document from last week said that the 120 per cent target could not be reached in 2020, only two years later, unless the ministers accept losses on their loans to Athens, provide additional financing or force private creditors into selling Greek debt at a discount.

The latest analysis for the ministers showed the debt could come down to 125 per cent of GDP in 2020, one eurozone official with insight into the talks said.

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