Greece bailout funds dependent on debt buyback - IMF

Greek anti-austerity protester
Image caption An agreement to go easy on austerity in the face of public protests has left Greece's lenders in a tangle

The International Monetary Fund has said that Greece must successfully complete a buyback of its own debt to get its next round of bailout cash.

The buyback is needed to cut Greece's debts to a level deemed sustainable by the IMF.

But the success of the buyback depends on the price Athens can buy the debts at in the markets next week.

The IMF and eurozone lenders agreed on Tuesday to release the next 44bn euros of bailout money on 13 December.

"We will be looking for implementation of the buyback operation," said IMF spokesman Gerry Rice.

"Contingent on that implementation and the success of the buyback programme, we'll be in a position to put forward the recommendation to our board."

Litmus test

Despite the fact that the new Greek government had carried out reforms and passed yet another harsh austerity budget required of it, the release of the next round of money was delayed for weeks by a disagreement between its lenders.

Lenders had agreed to grant Greece a two-year delay in the speed of spending cuts, in order to take some of the pressure of the country's heavily-depressed economy.

However, the extension inevitably meant the Greek government would be overspending for longer, and would therefore run up bigger debts than previously anticipated.

This ran into an objection from the IMF, who made clear that it could not lend money to a government whose debts it considered ultimately unlikely to be paid back.

The IMF's litmus test, laid down as a condition of Greece's latest bailout, is that the government's debts should fall to 120% of the country's annual economic output by 2020.

On Tuesday, the IMF and eurozone agreed that, in order to hit a slightly increased target of 124%, the Greek government's debts would have to be alleviated in three ways:

  • by requiring Athens to back some of its existing debts from private sector lenders at current depressed market prices
  • by the European Central Bank passing back to Greece the profits it has made on Greek government debts it owns
  • by cutting the interest rate Greece must pay on existing bailout loans

Germany and other eurozone governments opposed cutting Greece's debts by simply writing off some of the 150bn euros (£122bn; $195bn) of bailout loans that had already been extended.

The debt buyback is expected to deliver the majority of the total 40bn euros of debt reduction that the three measures are intended to achieve.

On Wednesday, the Greek government announced that it would seek to carry out a buyback next week.

How much of its debts Greece actually manages to cancel depends entirely on the price it can buy the debts back at.

For example, Greece's existing 10-year bond is currently traded in financial markets at a price of 35% of the amount owed. If Greece could buy the bond at this price, it would be able to cancel the other 65% of the money it owed under the bond.

If however Greece is forced to pay a much higher price for its debts, then the amount it could cancel would be commensurately lower.

In that case, the IMF may deem the government incapable of reducing its debts to a sustainable level, and therefore refuse to endorse the deal it reached with eurozone lenders, unless some other way could be found of reducing the Greek government's debt burden.

The price of Greek bonds has risen steadily since June - when the 10-year bond was valued at only 15% - although prices have remained largely unchanged since the country's lenders announced their agreement on Tuesday.

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