European finance ministers are set to decide this weekend—Monday night at the latest—on whether to extend a new batch of loans to Greece—another whopping 130 billion euros ($170 billion).
But the finance ministers face a dilemma. Due to Greece’s deteriorating financial situation, if this previously-designed deal is allowed to stand, Greece’s debt-to-GDP ratio will still remain above 120% by the year 2020.
That would violate one of the very specific conditions outlined in October, when this new bailout was designed.
What will they decide? They could simply look the other way and give Greece the money anyway.
Advocates for this course of action say this will at least solve the most pressing problem: Greece’s 14.5 billion euro ($19 billion) debt repayment on March 20.
That’s because Greece would use part of the loan to give a cash-sweetner to a separately-negotiated debt reduction deal with the banks to whom they owe money. Supporters of this view say it would maintain global financial stability by avoiding a messy default.
A second option is don’t give them the money at all.
If you want to improve Greece’s debt-to-GDP ratio, one of the simplest ways to achieve that is, don’t give them any more debt.
Advocates for this course of action equate it to ripping off the bandage quickly. Extremely painful in the short term—but the pain is of shorter duration.
This may be the least-likely scenario because it is extremely difficult for a committee to take such a step toward something that will cause chaos in the short term, regardless if it would be better in the long term.
The track record of European leadership demonstrates they would much rather push off days of reckoning.
A third option is to find more debt-forgiveness from the institutions to whom Greece owes money: the world’s financial institutions, the European Central Bank, their European partners in the form of the European Financial Stability Fund, or the IMF.
The world's financial institutions have already been told they will only get paid back 50% of what they leant to Greece. Theoretically they can be told they will have to take an even bigger loss, though none of my reporting suggests that is possibility, yet.
The European Central Bank has thus far refused to accept losses on the Greek debt they have bought. There are reports today that they are conducting an exchange of that debt for new debt, which would exempt them from taking part in the private sector deal. However, because the ECB bought most of that debt at a discount they could accept only what they paid for each bond. In other words, if they paid 78 cents for a bond, they could ask for only 78 cents in repayment, and thus avoid making a profit on Greek debt.
Sources tell CNBC that the European Financial Stability Fund could agree to give Greece an even lower interest rate on previous loans. This helps by a percentage or two when it comes to the debt-to-GDP ratio, but its not enough in total to get to 120%.
The IMF could provide them debt forgiveness, but this is perhaps the least-likely scenario. It is an inviolate rule that the IMF is always at the top of the capital structure, and not a single source has suggested that should be changed for the Greeks.
An added dilemma is what happens after the next round of Greek elections scheduled for April.
Will the new government agree to carry out what this government agreed to? That’s why there are suggestions that the loans to Greece be put in some kind of escrow account so that ultimately, Greece’s partners, and not Greece itself, control the disbursement of the funds.
The markets are acting like this will all be resolved. We might know on Monday night.