You are here

Greece gets creative in bid to ease debt burden

[ATHENS] Greece's new government is proposing creative solutions as it treads a delicate path between its obligations to international creditors and campaign promises to end austerity and reduce the country's debt.

"If we need to use euphemisms and tools of financial mechanisms to get Greece out of its debt-slavery, we will do it," Finance Minister Yanis Varoufakis said on Tuesday.

He insisted the new government, led by the anti-austerity Syriza party, "will not back down" in its efforts to lighten Greece's 315 billion euro (US$359 billion) debt burden, equivalent to 175 per cent of gross domestic product.

According to an interview with the Financial Times published on Tuesday, Mr Varoufakis proposes to replace 25 billion euros in Greek bonds owned by the European Central Bank (ECB) with "perpetual bonds", which have no set maturity or expiration date.

The advantage for Greece is that it will continue paying interest on the bonds, but will no longer have a repayment deadline hanging over it like a sword of Damocles. Under the current system, Greece is due to pay back seven billion euros to the ECB this summer.

Under the scheme, the central bank in Frankfurt would neither suffer losses on its Greek debt, nor have to declare Athens in default - avoiding dramatic market turbulence that would erupt if Greece were unable to honour matured bonds.

"A perpetual bond, which is never paid back, may be a little hard to accept. I imagine something closer to a compromise on a very long-term maturity, say, lasting 50 years," Frederik Ducrozet, an analyst at Credit Agricole, told AFP.

He called the proposal to delay Greek repayments for decades a "very good idea".

Mr Varoufakis also suggested in the FT that rescue loans issued by the European Union be exchanged for bonds "indexed to nominal economic growth".

Repayment of those would then be linked to the performance of the Greek economy.

The European Financial Stability Facility (EFSF), the European bailout fund, holds around 140 billion euros of Greek debt.

"It's a financial innovation, but we're not in entirely unchartered territory," said Mr Ducrozet, noting that securities of that kind were issued to ease the losses of private banks when Greek debt was restructured in 2012.

Argentina, another country that has been plagued by debt problems, has benefited from something similar.

"The proposals made by Varoufakis form the basis of an entirely plausible negotiation," said Mr Ducrozet - an opinion shared by many investors.

The Athens stock market soared by more than 11 per cent on Tuesday, and the rate of return on 10-year Greek bonds, a barometer of confidence, fell.

The Greek newspaper Kathimerini also reported that Greece wants to issue an increased number of short-term government bonds to cover the state's immediate funding needs.

Unable to access long-term lending markets because of prohibitive rates, Athens has been issuing bonds that mature after a few months. They are often bought by Greek banks.

Greece has reached its annual limit of 15 billion euros in short-term bonds, also known as treasury bills or t-bills, but reportedly wants to increase that to 25 billion euros.

Mr Varoufakis will also be asking for the profits made by eurozone central banks from holding Greek debts - about 1.9 billion euros - to be transferred to Greece by the end of February, Kathimerini reported.

This money was due to be included in the next tranche of international loans, worth seven billion euros. Athens says it does not want this, preferring to renegotiate the entire bailout programme.

To access these funds, and to raise the limit on its short-term bonds, Greece must first seek approval from the finance ministers in the eurozone, the so-called Eurogroup.

According to a diplomatic source, plans are being made for an extraordinary meeting of the group in the coming days.