ESM head: Greece may return to the markets before end of bailout program

Greece’s fiscal consolidation has been positive and strong and the country could return to the markets before the end of the current bailout program next year, European Stability Mechanism head, Klaus Regling, said in a speech at the Atlantic Council “EuroGrowth Initiative” event, held in Washington DC on Thursday. 

“I am confident the country can return to the market and stand on its own feet again before the program ends next year. As long as it implements the reforms that it has promised, it can be Europe’s next success story,” he said. 

Asked during a press conference after his speech whether Greek debt is sustainable, Regling said “it is not easy to answer” because it “depends on your assumptions”. He said based on the current lending arrangement, the last repayment from Greece to ESM will happen in 2060 and “a lot can happen by then”. 

“There can be no certainty as to what growth will be 10-20-30 years from now. And small variations in this growth assumption can have a huge impact on the assessment of debt sustainability,” he said. 

Regling said the ESM is in the middle of talks with the International Monetary Fund (IMF), the European Commission and the European Central Bank (ECB) which “are not easy but I’m optimistic we will manage to do that”. 

He also clarified that there is no debt overhang in Greece unlike what one reads in newspapers because ESM already provides debt relief. “Greece already benefits every year with 10 billion euros [of debt relief],” he said, adding that it is yet unknown if more will be needed but the issue “is on the Eurogroup agenda”.

Short-term debt relief measures

ESM is already implementing the short-term debt relief measures which are reducing the debt to GDP ratio in 2060 by 20 percentage points. “When the program ends in August next year the Eurogroup will look with the IMF at so-called medium-term debt measures, if needed, and that’s under discussion now, but they could be implemented if needed next year,” he said.

The most important, he continued, it that they made a long-term commitment and said that, in the long run, the euro-area is prepared to give additional debt relief to Greece is needed. “That’s very useful because uncertainty over a 30-30 year horizon is very high,” he said. 

Asked about the level of austerity in Greece, the head of ESM said “there has been tremendous austerity […] but one has to put it in context.” The fiscal deficit in 2009 was 15.6 percent of GDP, while last year it seems that there was a balanced budget, he explained. “There’s no need for additional fiscal adjustment.” 

From 1999 to 2009, Greece had the highest increase in income, which was much faster than productivity gains and that’s why the country lost competitiveness and run a tremendous current account and a big fiscal deficit, he said. “One can argue whether this fiscal adjustment should happen over five years, seven years, or nine years, but it has to happen.” 

On the program review, he said the institutions are preparing May’s Eurogroup and they will do that in Washington DC, on the sidelines of the Spring Meetings of the IMF and the World Bank. Regling also said the mission chiefs will return to Greece on Monday or Tuesday. 

He also said Greece could repay IMF’s loans with the unused ESM funds allocated to the country, but noted decisions will not be taken before the end of the program. 

Asked whether Greece’s bailout could become a success story, he responded: “If they continue with their reform program, it could be soon.”

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