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Greek debt sustainable but plenty of risks - IMF

WASHINGTON, May 10 (Reuters) - The International Monetary Fund said on Monday that Greece’s public debt is sustainable over the medium term but persistent low growth, or even a moderate economic jolt, could set back the euro zone country.

Under a baseline scenario, Greece’s public debt could peak at 149 percent of gross domestic product in 2013 and decline gradually to 120 percent in 2020, an IMF staff paper published late on Monday said.

In 2009 it reached 115 percent.

The staff report said the increase in Greece’s debt levels reflects “continued large deficits of the public sector, which would drop to 4.6 percent of GDP by 2013, low growth and deflation.”

The report offers the first comprehensive insights of the IMF’s analysis of Greece’s debt crisis, which prompted a historic 110 billion euro EU-IMF bailout for the country earlier this month and a further 750 billion euro ($1 trillion) emergency package on Monday to keep Athens’ problems from engulfing other euro zone countries and sparking another global crisis.

The IMF officially approved its portion of the earlier bailout money, about 30 billion euros, on Sunday along with a three-year economic program for Greece that envisages deep spending cuts and revenue increases.

Financial markets have been highly sceptical that Greece can meet those targets amid fierce public opposition to tough austerity measures, which are likely to weaken the economy even further. But analysts believe the latest emergency package has at least bought the EU some time, easing concerns that Athens could default on its debt in the near term. [ID:nSGE6490HH]

The IMF said its debt estimate assumes that the primary balance will improve to 6 percent of GDP by 2014 and beyond, from -8.6 percent of GDP in 2009.

IMF staff forecast output will contract by 4 percent in 2010-2011 and growth will reach 2.75 percent after 2015.

The report said while Greece’s average maturity of the debt is relatively high and there are large rollover needs in the next three to five years, the average remaining maturity of the general government debt is eight years.

More than one-third of the debt stock will mature in the next three years and almost half will mature in the next five years, it said.

It said of Greece’s total government debt, 98.5 percent is denominated in euro and 89 percent is fixed-rate debt.

The IMF noted that a 1 percentage point reduction in Greece’s growth rate each year could increase debt to around 166 percent of GDP by 2020. But faster growth by 1 percentage point could lower debt levels to 80 percent of GDP by 2020.

Meanwhile, if interest rates were to go up by 200 basis points they would increase Greece’s public debt to 131 percent of GDP by 2020, the IMF added.

The IMF staff said it could take time before market confidence in Greece is restored and estimated that the authorities have 1 to 2 years to build a track record before they need to return to the market.

Staff said while the Greek government was fully committed to meeting targets under the IMF program, there were also ample risks.

“Fiscal adjustment and the resumption of growth are expected to offer powerful assistance to place the debt on a declining path from 2013 onwards,” the paper said.

“That said, there are also substantial risks to the program. Restoring competitiveness through internal price adjustment while implementing fiscal consolidation is very challenging, and the margin to respond to negative shocks is limited at this early stage,” it added.

The report said Greece’s access to private capital markets in 2012 and later may be more constrained, and tackling the country’s deep fiscal problems required strong political will and public support.

It said while the government were making strong efforts to address data shortcomings, “the accuracy and reliability of fiscal and national accounts data remain a concern”. (For more stories on Greece’s debt crisis and the new EU-IMF $1 trillion emergency package, click on [ID:nLDE64908S]) (Reporting by Lesley Wroughton; Editing by Kim Coghill)

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