NEWS Release - Explainer on ESM short-term debt relief measures for Greece
Short-term debt relief measures for Greece: explainer
- When was it decided that Greece would receive short-term debt relief measures?
In its statement of 25 May 2016, the Eurogroup mandated the ESM to work on a first set of debt relief measures, referred to as short-term measures. The ministers said that these measures would be implemented after the closure of the first review and before the end of the current ESM programme (the third programme). The first review has since been concluded. On 5 December 2016, the ESM presented detailed plans for the short-term measures to the Eurogroup, which agreed to adopt them.
On January 23, the governing bodies of the ESM and of the EFSF formally completed the approval process of the measures, and implementation will now start.
2 . Will there be further measures in the future?
In its statement of 25 May 2016, the Eurogroup also mentioned a possible second set of measures, if needed, following the successful implementation of the ESM programme by Greece. These are called medium-term measures.
For the long term, the Eurogroup has agreed to a contingency mechanism to ensure long-run debt sustainability in case a more adverse economic scenario materialises in the country.
3. What are the guiding principles for additional debt relief?
The Eurogroup has excluded any nominal haircuts. It has further decided that the measures must: facilitate market access for Greece, in order to replace publicly financed debt by privately financed debt; smooth the repayment profile; incentivise the country’s adjustment process (even after the ESM programme ends); and ensure flexibility to accommodate uncertain economic growth and interest rate developments in the future.
4. Which short-term measures will be implemented?
There are three sets of short-term measures:
smoothing Greece’s repayment profile;
reducing interest rate risk;
waiving the step-up interest rate margin for 2017.
5. How does the smoothing of the repayment profile work?
The smoothing of the repayment profile refers to Greece’s second programme, with the EFSF. The weighted average maturity of the loans in this programme was initially agreed to be 32.5 years. Due to a number of factors, this has since dropped to approximately 28 years. The maturity will now be brought back up to 32.5 years, so that a number of repayment humps in the 2030s and 2040s can be spread out over several years.
6. What about the second measure, the reduction of interest rate risk?
There are three different schemes for the second measure.
The first is a bond exchange. To recapitalise banks, the EFSF/ESM provided loans to Greece worth a total of €42.7 billion. These loans were not disbursed in cash, but in the form of floating-rate notes. Greece used the notes to recapitalise banks.
The notes will now be exchanged for fixed-rate bonds with a longer maturity, or for cash. Because the new bonds are fixed-rate, Greece no longer bears the risk that interest rates will go up.
The banks are prohibited from selling the floating-rate notes and the fixed-rate notes to the market, but they can sell them to the ECB. Notes that the banks have sold are excluded from the exchange.
After a certain amount of time, the EFSF/ESM will buy back the fixed-rate notes the Greek banks still hold to avoid them having to bear the interest rate risk. This will be done with funds raised on the market. To ensure a smooth execution, this process will take place in several phases over a longer period of time.
The second scheme foresees the ESM entering into swap arrangements. This scheme would stabilise the ESM’s overall cost of funding and reduce the risk that Greece would have to pay a higher interest rate on its loans when rates in financial markets start rising in the future.
A swap is a financial contract that enables two counterparties to exchange, for instance, fixed-rate payments for floating-rate payments.
The third scheme, known as matched funding, foresees the ESM charging a fixed rate on part of future disbursements to Greece. This would entail issuing long-term bonds that closely match the maturity of the Greek loans.
Market conditions may influence the degree to which any of these three schemes can be applied.
page source https://www.esm.europa.eu/
