Explainer on ESM short-term debt relief measures for Greece
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ESM
Short-term debt relief measures for Greece: explainer
- When was it decided that Greece would receive short-term debt relief 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). On 5 December 2016, the ESM presented detailed plans for the short-term measures to the Eurogroup.
On January 23, the governing bodies of the ESM and of the EFSF completed the approval process of the measures. The measures were successfully implemented over the course of 2017.
- Will there be further measures in the future?
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.
- What are the guiding principles for additional debt relief?
- What do the short-term measures consist of?
* smoothing Greece’s repayment profile;
* reducing interest rate risk;
* waiving the step-up interest rate margin for 2017.
* reducing interest rate risk;
* waiving the step-up interest rate margin for 2017.
- How does the smoothing of the repayment profile work?
- What about the second measure, the reduction of interest rate risk?
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 ESM is now exchanging these bonds for fixed-rate notes, which it is then buying back for cash. This significantly reduces the interest rate risk that Greece bears. The ESM has raised all the funds that are needed for the bond exchange through issuing longer-dated bonds.
The second scheme foresees the ESM entering into swap arrangements. This scheme aims at stabilising the ESM’s overall cost of funding and reducing the risk that Greece would have to pay a higher interest rate on its loans when market rates start rising.
A swap is a financial contract that enables two counterparties to exchange the cash flow on two different securities, for instance, fixed-rate payments for floating-rate payments.
The ESM has now put the swap programme in place, and will continue to be active in the derivatives markets to maintain it.
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. This scheme will be implemented in 2018.
Market conditions may influence the degree to which the ESM can implement any of these three schemes.
- And the third measure, the waiver of the step-up interest margin?
- What savings will the measures bring for Greece?
However, caution is warranted. The impact of some of the measures hinges on several factors beyond the ESM’s control. These include the interest rate environment and the availability of other market participants to conclude some transactions.
- Are there any costs to the measures, and who will pay them?
Any costs from the three schemes to reduce the interest rate risk will be borne by Greece. This is particularly the case for the bond exchange and the interest rate swaps. Such short-term costs are more than compensated by the long-term benefits of the operation for Greece.
- Are there any costs for other euro area member states, and particularly the four former programme countries?
- Are there any costs for Greek banks from the bond exchange?
- What is the impact on the EFSF/ESM funding strategy?
For internal purposes, the ESM has created a portfolio that will contain the proceeds of all the operations required to fund the short-term measures, known as the ‘Greek Compartment’. This will enable us to isolate these costs, and pass them on directly to Greece, so that other beneficiary countries don’t bear any extra cost.
- Why did the Eurogroup decide to look into debt relief measures for Greece?
The Eurogroup has agreed that, under a baseline economic scenario, Greece’s GFN should remain below 15% of GDP during the post-programme period for the medium term, and below 20% of GDP after that.
Contacts
Anabela Reis
Deputy Head of Communications and Deputy Chief Spokesperson
+352 260 962 551
Juliana Dahl
Principal Speechwriter and Principal Spokesperson
+352 260 962 654