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Greece has come up with a swap deal to escape its 'debt slavery'

And it’s on the hunt for friends in Europe to back the plan.

Greek Prime Minister Alexis Tsipras
Greek Prime Minister Alexis Tsipras
Image: Petros Giannakouris/AP/Press Association Images

GREECE TODAY SOUGHT to add Italy to its supporters in a fight to secure easier terms on the country’s massive debt after unveiling new proposals to end a stand-off with international lenders.

Greek Finance Minister Yanis Varoufakis told international financiers in London yesterday that the leftist-dominated government in Athens would be making proposals for “a menu of debt swaps” that would avoid the need for any of the country’s €315 billion mountain of foreign debt to be written off.

The proposal, made public in an interview in the Financial Times, was interpreted by markets as a sign of flexibility and a boost to hopes for a negotiated resolution of a crisis that Britain described as the biggest current threat to the global economy.

Stock markets across Europe powered ahead on hopes of a negotiated settlement of a dispute that has brought EU divisions on austerity policies to a head.

In Athens, the government, which was buoyed at the weekend by public backing for its cause by US President Barack Obama, denied there had been a climbdown from election promises.

If we need to use euphemism and the tools of financial mechanisms to get Greece out of its debt-slavery, we will do it,” its spokesman said.

“The Greek public debt will be sustainable, the prospect of real growth will open and the Greek people will breathe at last.”

Haircuts avoided?

The government said the mechanisms for this to happen could include the  ”smart debt engineering,” outlined by Varoufakis in meetings with bankers in London.

This would involve the issuing of two new types of bonds. One would be linked to nominal economic growth to refinance European rescue loans, and the other would be “perpetual bonds” that would replace Greek bonds owned by the European Central Bank.

The approach would avoid creditors having to take a ‘haircut’ on the Greek debt, an outcome that is fiercely opposed by several EU countries led by Germany.

It would also be hard to stomach for Ireland, which was forced to stick to a painful programme of spending cuts as a condition of its own bailout in the aftermath of the 2007 financial crisis.

Varoufakis was to hold talks in Rome with his Italian counterpart Pier Carlo Padoan while Prime Minister Alexis Tsipras flew in from Cyprus to meet with his Italian colleague Matteo Renzi.

Greece Bailout Greek Finance Minister Yanis Varoufakis Source: Alessandra Tarantino/AP/Press Association Images

The debt swaps proposal was expected to get a sympathetic hearing from Renzi, who is well-placed to broker an end to the confrontation as he has the ear of German Chancellor Angela Merkel but is in the camp of those in the EU who want a more flexible, growth-first approach to the bloc’s economic policy.

“I believe it is crucial to send a clear message: we want to move the discussion on economic policy from austerity and rigour towards growth and investment,” Renzi said yesterday, while stressing the need for “prudence and responsibility” from all involved.

Greece’s debt is worth 1.75 times the countries entire annual economic output. Severe spending cuts mean the government now raises substantially more in taxes than it pays to fund services, but that surplus is more than wiped out by the cost of servicing the debt.

US President Barack Obama on Sunday appeared to side with Greece by warning of the dangers of “squeezing” an economy already gripped by painful recession.

Greece Election Source: Fotis Plegas G./AP/Press Association Images

Default ruled out

Tsipras has dismissed the “troika” system monitoring Greece’s economy – the International Monetary Fund, European Commission and European Central Bank” – as lacking legal status, and blames Germany for driving the tough austerity programmes his hard-left government has pledged to end.

He has however reassured markets by ruling out a unilateral default on any of the debts to the EU, European Central Bank and the IMF.

In contrast to Germany’s tough stance, France and other EU states have advocated fresh thinking to resolve the dispute and Greece is arguably in a strong negotiating position because of the chaos that could ensue if that does not happen.

European Commission President Jean-Claude Juncker said today the EU was ready to “rearrange some of our policies,” but warned Tsipras he also had to be ready to compromise.

“It’s not just one EU member that has expressed a democratic choice, there are other public opinions too,” Juncker told the European Parliament.

READ: The ECB is threatening Greece the same way it did Ireland before the bailout >

READ: A European country is wiping out thousands of its citizens’ debts. But it’s not Greece >

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