Greek debt number puzzle grows ever trickier

Tue Nov 20, 2012 9:08am EST

* Greek debt expected to be way above IMF's target by 2020

* Options being considered to get level down more quickly

* Lowering interest rate, debt buy-back may still not be enough

By Luke Baker

BRUSSELS, Nov 20 (Reuters) - Since the start of the Greek debt debacle, Athens and its European allies have battled to make the numbers add up and after three years of striving and two bailouts, it is still unclear whether they will get there.

When it comes to putting the economy back on a solid footing, none of the calculations is simple. But one target is straightforward: The International Monetary Fund has decreed Greek debt must be cut to 120 percent of gross domestic product by 2020 to be made "sustainable".

The euro zone needs to keep the IMF on board. If it walked away, the blow to Europe's credibility would be savage. Yet while the goal may be clear, attaining it is anything but.

Greece's total economic output after five years of recession is now estimated at 200 billion euros ($256 billion), while the total stock of debt stands at 340 billion euros.

That means the debt-to-GDP ratio is 170 percent and rising, since the economy is forecast to contract again next year and barely return to growth in 2014, putting the IMF-imposed target further and further out of reach.

Euro zone finance ministers and the IMF's managing director, Christine Lagarde, met in Brussels last week to discuss how to get Greece back on track. But after five hours of talks the meeting broke up, with the participants sharply at odds.

On Tuesday, the 17 finance ministers and Lagarde, this time joined by European Central Bank President Mario Draghi, will meet again to try to resolve their differences.

As well as giving a provisional go-ahead to pay 44 billion euros of emergency funds to keep Greece afloat, they will look at how to move more aggressively to get the debt level down to the 2020 target.

Officials have told Reuters the European Commission, the ECB and the IMF -- together known as the troika -- remain far apart in their analysis of Athens's long-term debt projections.

But an estimate that Greece would have debts of 144 percent of GDP in 2020 or 2022, unless further corrective steps are taken, has been doing the rounds in Brussels.

50 BILLION EURO HOLE

In raw terms, that means Greece is about 25 percentage points off-track, which means a further 50 billion euros will have to be cut from Athens' debt pile.

Since there are so many moving parts, including Greece's ever-shrinking economy, that number is no more than a snapshot. Nonetheless, several options are in the works, including:

* Extending the term and reducing the interest rate on loans already extended to Greece by euro zone governments

* The ECB and national euro zone central banks surrendering implied profits they have made on their holdings of Greek government bonds and returning the gain to Athens

* Greece buying back at a 75 percent discount about half of the 60 billion euros of Greek bonds still owned by private sector banks and investment funds

In a research paper published last week, Goldman Sachs estimated that those three steps, if carried out under a best-case scenario, could cut the total debt stock by 33 billion euros, while also reducing Greece's annual interest bill.

Overall, that could bring Greece's debt down to 120 percent of GDP by 2022, the report said. But it cautioned:

"There is also the risk that in the bad scenario, the target remains unattainable", explaining that debt probably would not fall to 120 percent of GDP until 2025 at the earliest under more negative conditions.

"And more broadly speaking, this is not an improvement in Greece's debt profile that would lead to near-term market access or one that could be considered a resolution of Greece-related uncertainties," the authors concluded.

Given that Greece has missed most of its targets over the past three years, best-case scenarios tend to be long shots.

Since GDP is likely to contract more than expected this year and possibly next, in order to get Greece's debt-to-GDP ratio below 120 percent by 2020 a reduction in its debt stock of up to 80 billion euros is probably necessary, Goldman said.

The problem is that the only remaining option to achieve the goal would be to write down the value of some of the 127 billion euros of loans so far made to Greece by euro zone governments -- so-called official-sector involvement.

That would mean taxpayers taking a direct loss, something no euro zone government wants and Germany in particular is determined to avoid with an election coming up in September next year. But having said they will do everything to keep Greece in the euro zone, there may be no other choice eventually.

With euro zone officials talking about nailing down a deal to Greek afloat just over the next two years, there is the possibility of Germany swallowing a more bitter pill in the future. The question is whether the IMF, which is pushing for a permanent solution now, will accept another short-term fix.

"If it were done when 'tis done, then 'twere well it were done quickly," said Shakespeare's Macbeth. Lagarde seems to agree. Some of Europe's leaders beg to differ.

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