A 50 per cent write-down on Greek debt holdings, part of the country's debt swap deal, is not enough to put the country's huge debt on a viable footing, an adviser to Germany's finance minister Wolfgang Schaeuble has told a Greek newspaper.
Banks and investment funds have been negotiating with Athens for weeks on a bond swap scheme which aims at cutting Greece's debt-to-GDP ratio from 160 per cent to a more manageable 120 per cent by 2020 and is a key part of a second, €130 billion bailout package for the country without which it risks default.
Under the so-called "private sector involvement" (PSI), investors will voluntarily accept a nominal 50 per cent discount on their Greek bond holdings in return for a mix of cash and new bonds. But talks have been held up by disagreements over the real cost of the haircut, through factors such as the coupon and maturity of the new bonds.
In an interview with To Vima's Sunday edition, Clemens Fuest, who is also an academic, said the Greek debt haircut should be higher than the agreed 50 per cent to help Greece repay its debt.
"This (50 per cent) rate was accompanied by the idea it would be associated with a long-term economic consolidation programme, which would reduce the accumulated debt to 120 per cent of the annual gross domestic product in 2020," he said.
"But such a reduction is not enough. We had already (a debt of) 120 per cent at the beginning of the crisis. So the reduction must be higher than 50 per cent."
Greece wants investors to voluntarily sign up to the PSI to avoid triggering a credit event for the country but Mr Fuest said this was putting the deal at risk and that the swap should be compulsive.
"To my view, Greece has already defaulted," he said. "I believe that the best thing would be if one honestly says that the Greek government cannot repay its debt. In such a way, a better settlement could be achieved".
Greece is racing against the clock to put in place long-delayed reforms and meet the terms of the European Union and the International Monetary Fund for continued funding ahead of a crucial visit of the "troika" of its international lenders in mid-January.
A Greek finance ministry official said last week the PSI scheme is expected to be completed around mid-January so that Greece could then conclude the negotiations on the terms of its second bailout.
But Mr Fuest warned that the PSI by itself could not help Greece unless it reformed its economy and did not rule out the nation quitting the euro, saying: "I only hope this won't happen".
Echoing Mr Fuest's remarks, Deutsche Bank chief economist Thomas Mayer told another Greek newspaper that Greece should put its finances in order to stay in the euro zone.
"Even after the (debt) restructuring, the prospects for the Greek debt remain a big challenge," Mr Mayer told Real News. "It is clear that only a comprehensive programme of economic reforms can save Greece from exiting the euro."
Reuters