Euro zone considers linking debt relief to Greek economic policy

Europa_Building_(EU_Brussels)_29 — The Europa building, a new €321m summit venue in Brussels, decorated with multicoloured ceilings and carpets intended to symbolise the “united patchwork” of Europe. / Wikimedia Commons

Euro zone creditors are working on a debt relief offer that Greece cannot refuse, with ‘incentives’ for Athens not to backtrack on the austerity programme imposed after its three international bailouts or as a senior EU officials put it, “to continue to stick to prudent fiscal policy”.

Greece is heading for ‘a clean exit’ from its bailout conditions on Aug. 20 when it will be return to market financing to serve its debts. Once the bailout ends, Greece will have a limited freedom to set its own economic policy after eight years of forced implementation of austerity measures imposed by the euro zone and the International Monetary Fund.

Some of the European lenders however are worried that as time passes, Greek politicians will be under increasing pressure to loosen the tight austerity that creates surpluses by squeezing public services and increasing taxes for low income earners, and they are seeking different ways to continue putting pressure on Greek governments for as long as possible.

European officials, as Reuters reports, believe that ‘a well-designed offer of debt relief for Greece could provide an incentive for Athens not to stray from the agreed reform path and keep a high primary budget surplus – the balance before debt servicing costs – of 3.5 percent of GDP, until at least 2022.

According to the same Reuters report, Valdis Dombrovskis, European Commission Vice-President for the Euro and Social Dialogue, said “We think it is fully realistic,...We expect Greece being on track with the fiscal trajectory.”

European Commissioner for Economic and Financial Affairs Pierre Moscovici also told Reuters in an interview on the sidelines of the IMF spring meetings in Washington. “We need to find debt relief which is convincing, The last building block is the post-program surveillance ... which ensures that reforms are pursued and that commitments taken by Greece on fiscal surpluses are realistic and are met. That is what we are working on,” Moscovici said.

Greece has used about half of the 75 billion earmarked for it in the latest bailout, and it is possible that the remaining reserved amount could be used by the euro zone to replace much more expensive IMF loans to Greece with its own, cheaper credit.

Greece might also receive back the profits made by euro zone national central banks on their portfolios of Greek bonds and see maturities and grace periods on euro zone loans extended.

Greece is to present next week at a meeting of euro zone finance ministers in Sofia its own plan for boosting economic growth.

The last hurdle to qualify for the euro zone debt relief offer is for Greece to implement its 88 remaining ‘prior actions’ by the end of May, so that euro zone finance ministers can review and approve their completion at a meeting on June 21.