Factbox: Details of Greek debt sustainability report

BRUSSELS Mon Feb 20, 2012 4:19pm EST

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BRUSSELS (Reuters) - An analysis by the IMF, European Central Bank and European Commission of Greece's debt mountain shows Athens will struggle to cut its debt burden to a target of 120 percent of GDP by 2020, documents obtained exclusively by Reuters show.

Following are the main points in the 9-page confidential report, which was completed on February 15 and submitted to euro zone finance ministers. It is the basis of discussions among the Eurogroup at a meeting in Brussels on Monday to decide on whether to sign off on a second financing program for Greece.

* The baseline scenario sees Greece being able to cut its debt-to-GDP ratio to 129 percent by 2020, but only if the country manages to follow through on all its structural reforms, fiscal obligations and its privatization program.

* A critical concern is that a deeper recession caused by delays with structural reforms and privatization implementation will set the program back. "This would result in a much higher debt trajectory, leaving debt as high as 160 percent of GDP in 2020," the report says. "Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it."

* The report says that Greece's banks may need as much as 50 billion euros of extra capital, 10 billion euros more than previously expected, with various analyses conducted by outside parties pointing to a worse-than-forecast situation.

* If Greece is to get its debt level down to 120 percent of GDP by 2020, then it will require additional private sector and official sector support, the reports says. It lists four ways in which the debt burden could be further lightened:

1) A restructuring of the accrued interest owed on debts that are due to be exchanged as part of the bond swap. This would shave a further 1.5 percentage points from the debt/GDP figure, and reduce official financing by 5 billion euros over the course of the program.

2) A reduction in the interest rate payable on loans extended to Greece under its first program in May 2010. If the interest rate spread is reduced to 210 basis points over the term of the loan it would reduce the debt burden by a further 1.5 percentage points by 2020.

3) National euro zone central banks that own Greek debt take part in the debt restructuring in the same way as private creditors will. That would reduce the debt level by about 3.5 percentage points, after accounting for sums needed to recapitalize the Bank of Greece.

4) The European Central Bank transferring the profit on its holdings of Greek bonds to national euro zone central banks and those funds then being discounted from Greece's debt obligations. That would reduce the debt pile by a further 5.5 percentage points by 2020. Official financing would also drop by around 5 billion euros, the report says.

* The debt sustainability analysis also provides the first confirmation of the offer being made to the private sector to take part in Greece's debt restructuring.

* The report says private sector bondholders will see a 50 percent reduction in the nominal value of their holdings, with 35 cents in every euro converted into 30-year bonds amortizable after 10 years and 15 cents paid upfront in short-term notes.

* A coupon of 3 percent would be paid on the bonds from 2012-2020, rising to 3.75 percent from 2021 onwards.

* A GDP-linked additional payment would also be made, capped at 1 percent of the outstanding amount of new bonds

* The report assumes a creditor participation rate of 95 percent.

* Overall, the report says "the Greek authorities may not be able to deliver structural reforms and policy adjustments at the pace envisioned in the baseline." It adds later: "The debt trajectory is extremely sensitive to program delays, suggesting that the program could be accident prone, and calling into question sustainability."

(Reporting by Jan Strupczewski; Writing by Luke Baker, editing by Mike Peacock)

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Comments (1)
paintcan wrote:
It is very important to know that debt to GDP ratio really matters after all. It isn’t always obvious to people who are not bankers. And it hardly gets mentioned in Reuters unless a country is zone is on the “concern” hit list. It also means that Japan and Zimbabwe are the worst cases on the planet. And articles don’t mention Japan embarrassments the way few writers mention Israel embarrassments.

If Greece, Japan or Zimbabwe were individuals or even corporations, they would be in bankruptcy proceedings. There is no receivership for countries and the UN doesn’t have deep enough pockets without passing the hat to every other country.

The Greeks should repudiate the money and save their lives. This memorandum says that even under the most fortuitous circumstances the debt will still be much too large and additional very large loans will be required. Greece is a country with a population of about 11 million people. It is not blessed with natural resources. The largest thing that has grown there is the city of Athens. Cities are not necessarily economic powerhouses any more because they attract so many people as the only show in the country. It is very hard to make the family home generate cash for its own dwellers. They tend to wear it out actually. New York City is always skirting close to economic difficulty but it is now a city of wealthy people and has received enormous Federal aid since 911 (well over 100 million even ten years ago). New York is a city that is always too big to allow failing. So is Athens. But cities are not alchemists and cannot make gold from dross and cannot always make more than they consume. Metro NY is actually larger than Greece.

NYC has been in receivership before and that is what should happen to Greece. Are they afraid that if they tax wealth, the wealthy will flee? I suppose the wealthy can do that anywhere? Now they face an enormous money hole that will sap so much economic vitality trying to refill it for so many years, they may die of exhaustion before they can shave a few points from the annual debt service. The refill material – private wealth and mega wealth – aren’t being touched just yet but the package rest on that voluntary assistance for a smallish return (but it’s better than many other places). And the solution depends on their faith the hole can be filled. This story is definitely not about the miracle of the loaves and the fishes.

Of course the political situation will not be fortuitous because anyone with cash assets or incomes will scream at the first mention of real income taxes and that is what is absolutely necessary to keep the government afloat and to return it to a state of solvency. And in a political system as corrupt as so many comments claim (and they sound like they are Greek who claim that): the private purchase of income streams will not cease because of the crisis but will likely get worse. They might actually have a better chance of wage and benefit austerity measures if they also instituted corresponding accumulated wealth claw backs.

The rescue is predicated on doing everything but admit out loud that income tax must be raised on the wealthy and those still with incomes. They won’t be able to do that with those already living hand to mouth.

Lets face it kids – everyone on earth but the Germans, the Chinese and the Russians are broke. But their time is coming no doubt. But enormous numbers of people or all income ranges including those living hand to mouth, are facing tighter budgets. And that will become a bigger number unless the government is proposing that Greeks seriously downsize their lives by setting their old people out on deserted Greek islands without water (to die) and sell their daughters and sons for sex to floods of tourists. But however they accomplish cost savings, or extra income, it is death to a consumption driven economic system.

Greece still has oodles of cash stashed away and they would like Romney – if he were Greek. Actually Romney would like the Greek system – the very low tax part anyway. I can’t read Greek so I take the comments that mention the subject at face value.

Everyone complains about the bloated government payrolls but how much is there to do in Greece? In 50 years – if it hasn’t got the dynamic industrial base that employees enough Greeks, than they aren’t like to get it.

It was so unfortunate that they spent a fortune on the Olympics and even surprised the committee that the sites were actually ready on time, and the ticket sales were a bust.

I’m under no illusions about our own fiscal health. The biggest reason there isn’t more rioting here so far – we may not be that bad off yet, the police are very strong and efficient, the country is aging and they tend to be wealthy and there are too few youths to fights the system. Ask OWS.

Feb 20, 2012 6:46pm EST  --  Report as abuse
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