LUXEMBOURG (Reuters) - Euro zone finance ministers will decide on Thursday how much cash and debt relief to give Greece in return for compliance with economic reforms, to ensure Athens can finance itself after it exits its bailout in August.
Greece has been living primarily on money borrowed from euro zone governments in three bailouts since 2010, when it lost market access because of a ballooning budget deficit, huge public debt and an inefficient economy and welfare system.
With hundreds of reforms requested by its creditors already completed, Greece has made significant progress, but to lend to it again, investors need to know that the country will not collapse under the weight of servicing its debt of 180 percent of GDP.
Euro zone governments, Greece’s main creditors, plan to look at its debt servicing costs over coming decades to smooth out any sharp peaks.
Athens faces bond repayments of around 7 percent of its output next year, the first after its third bailout ends in August. For more details of Greece's outstanding debt, check this graph: tmsnrt.rs/2JYhBYS.
Greece’s borrowing costs could spike after it leaves the bailout program if investors are not confident about the sustainability of its debt, amid growing market concerns over looming trade wars and rising eurosceptism.
“Mooted debt relief measures only push the problem further into the future and Greece will remain vulnerable to a renewed downturn in its own economy or a flare-up in market fears about the euro-zone more generally,” Capital Economics, a research firm, said in a note.
EU officials said on Thursday they were confident of a deal.
“We need a balanced compromise between all actors, ensuring growth and sustainable debt for the future. That means agreeing upfront measures to meaningfully lighten Greece’s debt burden, which must be put on a sustainable path,” European Commissioner for Economic and Financial Affairs Pierre Moscovici said.
While loan write-offs are not under consideration, euro zone ministers are considering extending maturities and grace periods by up to 15 years on the 130 billion euros extended to Greece under its second bailout.
They are also considering the return to Athens of profits made by euro zone central banks on their Greek bond holdings, buying out more expensive loans from the International Monetary Fund and Greek debt held by the Eurosystem of central banks.
Officials said on Thursday that only part of the outstanding 22 billion euros owned by the IMF and euro central banks could be bought out, adding that talks were still ongoing.
To make sure Greece can choose the best moment to tap markets again, the euro zone also wants to provide Athens with a cash buffer of around 20 billion euros that would keep it independent of market borrowing for 18 to 24 months.
But wary that future Greek governments might yield to pressure to reverse some of the unpopular reforms implemented under the bailouts, the euro zone will also seek to link some measures to compliance with agreed policies.
The euro zone will review the Greek economy every quarter to monitor if the agreement is upheld. Should Athens backtrack on commitments, the euro zone is considering a clause that would make the whole debt relief arrangement null and void.
Euro zone finance ministers also plan to link payouts to Greece of 1.2 billion euros a year until 2022 to continued implementation of reforms agreed under its bailout agreements, a document prepared for the ministers showed on Thursday.
Additional reporting by Renee Maltezou and Peter Maushagen Graphic by Lea Desrayaud; Editing by John Stonestreet and Andrew Heavens