What is debt 'reprofiling'?

Debt restructurings can range from tinkering at the edges to wholesale payment reductions

For the first time, the European negotiators sitting down with the Greek government have raised the possibility of tinkering with Greece's debt repayment terms.

Jean-Claude Juncker, head of the eurozone group, has conceded that a "kind of reprofiling" is on the table, although there was no question of a "large restructuring".

But what exactly does "reprofiling" involve, and why is this the only option that European leaders are - at least for now - seemingly willing to consider?

'Snowball'

One thing the markets clearly agree on is that Greece cannot repay its debts.

The country's cost of borrowing over two years is 24% a year - in other words, lenders want to make up via interest payments the huge chunk of money they believe Greece will be unable to repay two years down the line.

Yet European ministers find themselves on the horns of a nasty dilemma.

For as much as they may (or may not) want to ease Greece's burden, they also need to worry about Greece's lenders, not to mention the lenders to Portugal and the Irish Republic.

Many of those lenders are banks in France, Germany and elsewhere.

And very few of those banks have as yet recognised any losses on the money they have lent to Greece and others.

The fear is that a formal default by Greece - a refusal by Athens to honour the terms of its debt repayments - would trigger another financial crisis.

"It would be very difficult to limit the contagion, as markets would very quickly anticipate the same default for Portugal and Ireland, and then the losses would begin to snowball," says Dr James Nixon, chief Europe economist at Societe Generale.

Buying time

A heavily indebted country has three options to ease its burden:

1. it can ask (or tell) creditors to give it more time to repay

2. it can cut the interest payments on its debts

3. it can simply cut the total amount of money it owes (a "haircut").

Option three is the nuclear option - the one that policymakers fear would lead to a widespread financial meltdown.

"Reprofiling" would appear to encompass a voluntary version of option one.

However, unlike the other two options, asking for more time does not in any way make the country's debtload more sustainable.

All it does for Greece is buy time.

It also reduces the total amount of any extra loans Greece needs from its European partners to a more politically palatable number.

"There is an awful lot to be said for the strategy of buying time," says Dr Nixon.

He points out that it gives more time for Greece's economy to turn around.

It gives the banks more time to build up their capital reserves to absorb the debt haircut that everyone seems to think will eventually emerge.

And it also gives other countries - notably Spain - a chance to turn their own economies around, insulating them from the financial fall-out from any eventual Greek default.

Middle way?

Dr Nixon says Greece is expected to focus on extending debt repayments due in the next two years.

After that, Europe's replacement bail-out mechanism kicks in - and that one contains a specific requirement for "negotiation with creditors" if a country's debtload fails a "stability analysis".

And what of option two - reducing Greece's interest payments?

That may also be under discussion, as it could offer real debt relief to Greece, but without seriously damaging its lenders' balance sheets.

But perhaps real debt relief is something that Greece's European partners are not interested in offering.