Playing nice may suit Greece's official lenders

23 August 2012 | By Neil Unmack Follow @twitterapi

Greece wants to delay its austerity, but its lenders won’t give it more money. However, the government seems to have a cunning plan that would allow it to spread the budget cuts over four years, rather than two, and allow euro zone governments to skip Parliamentary approval. It would also leave the International Monetary Fund to pick up the bill.

The Greek government hasn’t asked for anything yet, but it is testing the waters for a two-year extension plan of its austerity programme. The cost has been estimated as high as 50 billion euros, but Greece seems to think it would only amount to 20 billion euros. The ultimate number depends on how much spreading austerity will boost growth, and whether it will allow the government to sell assets faster.

The idea rests on Greece issuing short-term treasury bills, instead of redeeming them as planned. It would also imply that the IMF bring forward some funds originally promised for 2015, and delay the repayments that were to start in 2016. These ideas aren’t as free as the Greek government seems to think. Both could mean increasing the amount of debt that can’t be haircut in a restructuring (treasury bills, and the IMF loans), potentially implying steeper losses for other creditors. The European Central Bank would also have to be happy to finance the government indirectly by funding Greek bank T-bill purchases.

For Prime Minister Antonis Samaras, securing the extra two years would be a domestic coup, but it’s not clear that Greece’s partners will play ball. At least it would reduce the chances of a near-term blow-up in Greece - and severe losses for euro zone lenders. However, the IMF probably prefers that Greece’s euro zone partners write down their debt more fully, rather than extend more debt itself.

A proper restructuring of Greece’s debt would be more sensible, though Europe’s leaders and their electorates may not have the stomach for it yet. If Greece’s growing debt burden, or the IMF, forces the euro zone to take losses, they might start by haircutting bonds held by the ECB, or forgo some interest payments on their Greek loans. In any case, Samaras’ plan will not be free for everyone for long.

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Antonis Samaras, Greece’s prime minister, said in an interview with a German publication that Greece should be given more time to implement spending cuts promised under its second bailout, but this would not require the euro zone to lend more money. Greece must carry out 11.7 billion euros of spending cuts in 2013 and 2014 as a condition of its second bailout.

“All we want is a bit of ’air to breathe’ to get the economy running and to increase state income”, Samaras told Bild newspaper in an article published on Aug. 22. “More time does not automatically mean more money.”

Samaras will meet French President Francois Hollande and German Chancellor Angela Merkel this week. His government is hoping to defer part of the spending cuts promised in 2013 and 2014 by two more years. According to the Wall Street Journal, the government believes the funding gap from the extension would total 20 billion euros, and could be met without euro zone governments needing to seek additional funds from their parliaments. The gap would be filled through issuance of short-term treasury bills, and altering the maturing of payments made by the International Monetary Fund in the first and second bailout, bringing forward IMF payments from 2015, and delaying repayments from 2016, according to the Journal.

Wolfgang Schaeuble, Germany’s finance minister, said in an Aug. 23 radio interview that giving Greece more time to implement its spending cuts would mean “more money”.