The country has been hit hard by the Corona crisis and is more indebted than any other in the euro area. In order to remain creditworthy, the finance minister uses a trick.
The Corona recession has thrown Greece far behind in reducing its national debt. Now Athens wants to reduce the debt ratio with the early repayment of aid loans. Finance Minister Christos Staikouras also hopes that this will give his country a better credit rating. Greece is therefore negotiating with its creditors about early repayment.
Greek debts stem from the euro crisis
According to unofficial information from financial circles, it is about the repayment of loans that Athens received as part of the first aid program launched in May 2010, the so-called Greek Loan Facility (GLF). It comprised bilateral loans from the euro countries and the International Monetary Fund (IMF) amounting to 110 billion euros. The regular repayment of these loans runs until 2041. Athens now wants to repay two loan installments of 2.64 billion euros each, which are scheduled to be due in 2022 and 2023, early, if possible this year.
The negotiations are complicated, however, because all of Greece’s official creditors – that is, the euro governments, the euro stability fund ESM, its predecessor EFSF and the IMF – have to agree to an early repayment. 75 percent of the Greek national debt rests with these public creditors.
Debt ratio at over 200 percent of GDP
Finance Minister Christos Staikouras is in a hurry with the repayment. Because the pandemic has driven Greece deeper than previously known into recession. This is shown by the latest figures published by the state statistics office in Elstat on Thursday. After that, the Greek economy did not shrink by 8.2 percent in 2020, as previously assumed, but by nine percent. To support struggling companies and save jobs at risk, the government pumped over 40 billion euros into government aid during the pandemic business. Greece’s household spending reached 60.7 percent of gross domestic product (GDP) last year. Only France recorded an even higher expenditure ratio of 61.8 percent. The average for the euro zone was 53.6 percent. Greece’s budget deficit exploded to 10.1 percent of GDP in 2020. According to calculations by Elstat, Greece’s national debt reached 341.1 billion euros last year.
Due to the high budget deficit and the weaker economy, the debt ratio, calculated as a function of economic output, rose. According to Elstat, it reached a new record in 2020 with 206.3 percent of GDP. For 2021, Finance Minister Staikouras has so far set a decline in the debt ratio to 197.7 percent. In view of the now revised figures for 2020, this target has become questionable. With the early repayment of aid loans, the finance minister wants to ensure that the rate actually falls below the 200 percent mark.
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Hope that Greece rises to the league of investment-worthy borrowers
The money for the repayment of the loans should come from the liquidity reserve. Greece currently has reserves of around 38 billion euros. The cushion was created in 2018 when the rescue programs expired from unneeded aid loans and has since been topped up with several bond issues. Progress in deleveraging is considered a prerequisite for a better credit rating. So far, the rating agencies have rated Greece one to three notches below investment grade.
The government hopes Greece will join the investment-worthy league in 2022 or 2023. That would make refinancing on the financial market easier.
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