Greece Creditors Debate Extensions on Bailout Loans

Greek bailout talks are reaching the final stretch and creditors are debating what relief measures they can offer Europe’s most-indebted state to ease its financial burden and facilitate its exit from the latest lifeline.

Negotiations over the type, size and conditions of likely debt relief have been contentious, though all parties want to reach a final agreement by June 21, when eurozone finance ministers meet in Luxembourg, Bloomberg reported.

At stake is the country’s ability to meet its obligations over coming decades as well as whether markets perceive its debt as sustainable enough to invest in Greek securities again after the country’s bailout expires on Aug. 20.

Eurozone finance ministers agreed last summer to consider an extension of up to 15 years on some of Greece’s loans from the European Financial Stability Facility—the predecessor to the euroland’s bailout fund. The extension would only apply to as much as €96.4 billion ($112 billion) in loans, and excludes those received bilaterally from eurozone countries and any outlays from the current program.

While creditors such as the International Monetary Fund have been urging the maximum 15-year extension, Germany has been pushing for as little as three years, arguing that for now Greece doesn’t need more than that to make its debt sustainable. In the end, eurozone officials expect the number to be closer to the high single digits.

Through its bond-buying securities and markets program and the agreement on net financial assets, the European Central Bank and eurozone central banks hold some €12.8 billion in Greek bonds, the profits from which are redistributed to eurozone governments.

These profits from bond holdings, which will amount to around€ 4 billion until 2022, have been promised to Greece in order to help it ease its debt burden. This sum will likely be split into annual disbursements and used as a carrot creditors can offer Greece over the next few years in order to ensure the country sticks to its reform commitments and fiscal path.

By the end of its bailout, Greece will have about €27.4 billion of unused loans from its latest €86 billion bailout. This means the country could use the cheap funds to repay early some of its more expensive loans that fall due sooner, such as the €10.4 billion from the IMF, €12.8 billion from the ECB and €52.9 billion from other eurozone countries.

Any such buyback will help Greece service its debt, especially over the next four to five years as it will likely reduce the country’s financing needs to a level that wouldn’t require seeking funds from bond markets.