Greek debt can only become sustainable by 2022 if all steps taken - document

BRUSSELS Tue Nov 20, 2012 8:37pm EST

BRUSSELS Nov 21 (Reuters) - Greek debt can fall to below 120 percent of output by 2020 only if euro zone countries accept losses on their loans to Athens, provide additional financing or force private creditors into selling Greek debt at a discount, according to a document prepared for a meeting of finance ministers on Tuesday.

The 15-page document shows that without a package of debt-reducing measures Greek debt will fall to 144 percent of GDP in 2020, 133 percent in 2022 and 111 percent of GDP in 2030, from a current level of around 170 percent.

"The package of options will not make it possible to arrive at a debt-to-GDP ratio of close to 120 percent in 2020 without taking recourse to measures that would entail capital losses or budgetary implications for euro area member states or envisage a more comprehensive DBB entailing the activation of collective action clauses," the document said.

"It may therefore be considered to postpone the benchmark for debt sustainability to 2022 by when Greece's debt-to-GDP ratio can be expected to fall below 120 percent, through the joint application of the ... measures," it said.

The document said a reduction of interest rates on bilateral loans to Greece by 70 basis points from the current 150 basis points above financing costs would cut debt by 1.4 percent by 2020. A much deeper cut to 25 basis points would result in debt falling by 5.1 percent of GDP by 2020.

Deferring interest payments by 10 years to 2022 on loans made through the euro zone's temporary rescue fund would cut Greek debt by 43.8 billion euros, or 16.9 percent of GDP.

If the European Central Bank (ECB) returned the profits it made on its Greek bond portfolio, Greece's debt would be fall by a further 4.6 percent in 2020, the document showed.

Buying back 10 billion euros worth of Greek bonds from private investors at 50 cents per euro would result in debt falling by 2.4 percent of GDP by 2020.

But the combined elements would still fail to reduce the overall debt-to-GDP ratio to 120 percent by 2020, the level the IMF has deemed as "sustainable". If that target cannot be reached, the IMF may withdraw from the Greek bailout programmes.

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Comments (1)
dareconomics wrote:
Greece is heading for a 3rd bailout that entails eurozone write-downs of its holdings of Greek debt whether Germany, Finland, Austria and the Netherlands like it or not.

In March’s second bailout of Greece, the troika agreed to designate a sustainable debt ratio 120% of GDP by 2020. This number is problematic for two reasons.

First, assumptions for Greek economic growth are much higher than warranted; Greece will never grow enough to reduce the debt to 120% of GDP. If Greece’s economy is merely 10% smaller than projected by 2020, the ratio will be 133%. Recall that all economic forecasts for Greece have been much rosier than reality since the start of the crisis, and you will see that this is a reasonable assumption to make.

Second, the ratio is unrealistic anyway. Spain currently has a debt ratio of 90%, and it’s in a lot of trouble. Italy is both wealthier and more economically developed than Greece, and it is having problems with a 120% ratio. Even if Greece somehow manages to attain this number, it will still be choking on too much debt.

The politicians wish to delay the day of reckoning as long as possible to retain power, and these are their ideas:

Reduce interest rates on bilateral loans to Greece to 25 bp saving 5.1% of GDP by 2020.
Having the ECB return profits on its Greek debt holdings to the eurozone members who will give them to Greece for a savings of 4.6% of GDP.
Another default on private debt holdings in the guise of a buyback for 2.4% of GDP.

I have omitted one idea from the list. The eurozone also wishes to merely defer interest payments on Greece EFSF loans to 2022 and claims a savings of 16.9% of GDP. This is not true, because the debt is not being saved but rather being pushed past the sustainability date. This means the debt will rise again after meeting the target and after the deferment is over. This fudge is as cynical as it looks.

Adding numbers one through three, we arrive at a savings of 12.1% of GDP subtracted from 144% gives us a number of 129.9% of GDP. The bottom line is that the eurozone will have to forgive some of its loans to Greece in order to achieve the magic number, but Greece will still default despite this assistance.

The eurozone will eventually write-down some of the loans. If Greece is going to default anyway, forgiving loans that will never be paid back does not matter. Eventually, the can will be kicked right off the road, but in the meantime the politician remain in power. A default somewhere in the future is better than a default today.

dareconomics.wordpress.com

Nov 21, 2012 8:43am EST  --  Report as abuse
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