Saturday, February 6, 2016

Lagarde: Debt Relief For Greece!

Christine Lagarde of the IMF considers debt relief for Greece as important as the reform of the Greek pension system, reports the Ekathimerini. Well, in a way she is quite right!

Those arguing in favor of debt relief create the impression that the immediate consequence of such debt relief would be a relaxation of fiscal pressures. That is true only where debt relief leads to an immediate reduction in interest expense. Most of the EU financing for Greece is currently (and until 2022, I believe) free of interest. Even if one forgave all of that debt, there would be no impact on Greece's fiscal balance in the next years.

Greece has spent about 5,7 BEUR annually on interest in the last couple of years. One would have to examine who that interest was paid to. If the recipients of that interest forgave their debt, Greece would immediately benefit.

I don't have the numbers but I would guess that the largest recipient of Greek interest is the IMF since I believe IMF loans carry an interest rate of about 3,5%. I would further guess that the second largest recipient group of Greek interest are the remaining private bondholders. After all, their interest rates are somewhere in excess of 5%. However, it would be next to impossible to engage the remaining private creditors in a debt relief program at this time (or ever). They would likely prefer to remain hold-out's à la Argentina.

My recommendation: the IMF, ever so concerned about debt relief for Greece, should (1) publish a breakdown of the recipients of the 5,7 BEUR in Greek interest, (2) sort the recipients from top down and (3) start negotiating with the first one on the list.

The IMF would be negotiating with itself!


  1. Lagarde's idea of debt relief is that debt should be erased by the -other- lenders (not by the IMF). Evidently, the more debt is erased by others, the better chances for the IMF to recover its own loans.

  2. Why the heck should the IMF contribute? Is it not enough that USA give their moral support to Greece?

  3. If Greece, with 11 million people,cannot handle a 5,7 BEUR interest then their economy is not viable. Neither would it be if the interest was reduced to 3 or even 0 BEUR. That is the reason they stayed in the EZ.