Greece needs extra official, private help to hit debt goals

BRUSSELS Mon Feb 20, 2012 3:22pm EST

BRUSSELS Feb 20 (Reuters) - Greece will need additional relief if it is to cut its debts to 120 percent of GDP by 2020 and if it doesn't follow through on structural reforms and other measures, its debt could hit 160 percent by 2020, a debt sustainability report by the IMF, European Central Bank and European Commission shows.

The baseline scenario is that Greece will cut its debt to 129 percent of GDP in 2020 from 160 percent now, well above the targeted 120 percent, the confidential, 9-page analysis prepared for euro zone finance ministers showed.

"The results point to a need for additional debt relief from the official or private sectors to bring the debt trajectory down," said the report, dated Feb. 15 and obtained by Reuters.

The report forms the basis of discussions of euro zone ministers on the conditions under which Greece is to get further financial help from the euro zone and the IMF.

"There is a fundamental tension between the program objectives of reducing debt and improving competitiveness, in that the internal devaluation needed to restore Greece competitiveness will inevitably lead to a higher debt to GDP ratio in the near term," the report said.

"In this context, a scenario of particular concern involves internal devaluation through deeper recession (due to continued delays with structural reforms and with fiscal policy and privatisation implementation)," it said.

"This would result in a much higher debt trajectory, leaving debt as high as 160 percent of GDP in 2020. Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it," it said.

The report said that debt could be reduced to 120 percent from 129 percent through a restructuring of the accrued interest on Greek bonds, which would shave 1.5 percentage points off the final result.

A further 1.5 percent could be obtained from lowering interest rates on bilateral euro zone loans extended to Athens under the first bailout programme and 3.5 percentage points could be saved by restructuring the portfolios of Greek bonds held by euro zone central banks in their investment portfolios.

The biggest contribution to the debt reduction, however, could come from the ECB forgoing profits on the Greek bonds the central bank bought under a market intervention programme since 2010 as it would cut the debt by 5.5 percentage points.