Euro zone to link debt relief to sound future Greek policies

By Jan Strupczewski

WASHINGTON (Reuters) - Euro zone creditors are working on a debt relief offer for Greece that would be an incentive for Athens not to backtrack on reforms from its three international bailouts and to continue to stick to prudent fiscal policy, senior EU officials said.

Greece is to exit its bailout on Aug. 20 and return to market financing after eight years of living on cheap euro zone loans it got in return for painful reforms, after investors refused to lend to it in 2010 because of its ballooning deficit and debt.

Once the bailout ends, Greece will be free to set its own economic policy - a political turning point for the country that has long been forced to implement highly unpopular reforms suggested by the euro zone and the International Monetary Fund.

But many officials are worried that as time passes, Greek politicians will be under increasing pressure to loosen budget strings again, so they are seeking ways to make it worth Greece's while to be fiscally prudent as long as possible.

"The Greek government needs to stick to the implemented reforms and post-programme fiscal trajectory, which means sustained large levels of primary surpluses for an extended period of time," European Commission Vice President Valdis Dombrovskis told Reuters in an interview.

Officials say a well-designed offer of further debt relief for Greece could provide an incentive for Athens not to stray from the agreed reform path and keep a high primary budget surplus - the balance before debt servicing costs - of 3.5 percent of GDP, until at least 2022.

"We think it is fully realistic," Dombrovskis said. "We expect Greece being on track with the fiscal trajectory."

Another way of ensuring Greece sticks to sound policies would be through extending a precautionary credit line from the euro zone bailout fund ESM to Greece, because such a credit line comes with conditions.

But this is why Athens does not want it, and the euro zone neither can, nor wants to force Greece into some new bailout in disguise.

NO NEW "BAILOUT IN DISGUISE"

"For me this is out of the question. It is something that would be unfair, that would not be legitimate," European Commissioner for Economic and Financial Affairs Pierre Moscovici told Reuters in an interview on the sidelines of the IMF spring meetings in Washington.

"We need to find debt relief which is convincing," Moscovici said, noting the basis for that was in a French proposal to link debt repayment to the pace of GDP growth - the faster the Greek economy expands, the higher the debt repayments.

"The last building block is the post-programme surveillance ... which ensures that reforms are pursued and that commitments taken by Greece on fiscal surpluses are realistic and are met. That is what we are working on," Moscovici said.

Officials said the euro zone offer would have to include some debt relief up front and some spread over time.

Because Greece will not have used all the money earmarked for it in the latest bailout, possibly up to 27 billion euros, this could be used by the euro zone to replace much more expensive IMF loans to Greece with its own, cheaper credit.

While there is no discussion of a reduction of the nominal value of the Greek debt, Greece might also receive back the profits made by euro zone national central banks on their portfolios of Greek bonds and see maturities and grace periods on euro zone loans extended.

As part of the debt relief plan, Greece is to present next week at a meeting of euro zone finance ministers in Sofia its own plan for boosting economic growth.

Euro zone officials say it is a crucial part of the plan, because no outside incentives for sound policy will work well if Greece itself does not believe in the suggested policy.

The last hurdle to qualify for the euro zone debt relief offer is for Greece to implement 88 so-called prior actions - final reforms agreed with the creditors - by the end of May, so that euro zone finance ministers can review and approve their completion at a meeting on June 21.

"When we conclude that chapter, it will have not only material, but also symbolic significance that those 10 years of crisis are over," Moscovici said.

(Reporting By Jan Strupczewski; Editing by Andrea Ricci)