No Greek debt relief needed if primary surplus above 3 percent/GDP for 20 years: paper

BERLIN (Reuters) - Greece will not need any debt relief from euro zone governments if it keeps its primary surplus above 3 percent of GDP for 20 years, a confidential paper prepared by the euro zone bailout fund, the European Stability Mechanism (ESM), showed.

A Greek national flag flutters as the moon rises in Athens, Greece February 9, 2017. REUTERS/Alkis Konstantinidis

The paper, obtained by Reuters, was prepared for euro zone finance ministers and International Monetary Fund talks last Monday, which ended without an agreement due to diverging IMF and euro zone assumptions on future Greek growth and surpluses.

A group of euro zone finance ministers led by Germany’s Wolfgang Schaeuble insists that the issue of whether Greece needs debt relief can only be decided when the latest bailout expires in mid-2018.

The IMF says the need for a bailout is already clear now.

Under scenario A, the paper assumes no debt relief would be needed if Athens kept the primary surplus -- the budget balance before debt servicing -- at or above 3.5 percent of gross domestic product until 2032 and above 3 percent until 2038.

The European Central Bank says such long periods of high surplus are not unprecedented: Finland, for example, had a primary surplus of 5.7 percent over 11 years in 1998-2008 and Denmark 5.3 percent over 26 years in 1983-2008.

A second option under scenario A assumes Greece secures the maximum possible debt relief under a May 2016 agreement.

Greece would then have to keep its primary surplus at 3.5 percent until 2022 but could then lower it to around 2 percent until mid-2030s and to 1.5 percent by 2048, giving an average of 2.2 percent in 2023-2060.


The paper says the maximum possible debt relief under consideration is an extension of average weighted loan maturities by 17.5 years from the current 32.5 years, with the last loans maturing in 2080.

The ESM would also limit Greek loan repayments to 0.4 percent of Greek GDP until 2050 and cap the interest rate charged on the loans at 1 percent until 2050.

Any interest payable in excess of that 1 percent would be deferred until 2050 and the deferred amount capitalized at the bailout fund’s cost of funding.

The ESM would also buy back in 2019 the 13 billion euros that Greece owes the IMF as those loans are much more expensive than the euro zone’s.

All this would keep Greece’s gross financing needs at 13 percent of GDP until 2060 and bring its debt-to-GDP ratio to 65.4 percent in 2060, from around 180 percent now.

Scenario A assumes average annual economic growth in Greece of 1.3 percent during the forecast period.

The IMF believes such economic growth and primary surplus assumptions are unrealistic in the case of Greece where policy-making institutions are weak and productivity is low.


Scenario B is built on the IMF’s assumptions of average growth of 1 percent and a return to a primary surplus of 1.5 percent from 2023 after five years at 3.5 percent. This sees Greek debt rising from 2022 and reaching 226 percent in 2060.

Greek banks would then have to be recapitalized and the country’s gross financing needs would, in the late 2020s, be above the ceiling of 15 percent of GDP promised by euro zone ministers, reaching more than 50 percent in 2060.

To make Greek debt sustainable under the IMF assumptions, the euro zone would have to give Greece deeper debt relief than it conditionally offered in 2016 -- something ministers reject.

In May 2016, the euro zone promised to extend the maturities and grace periods on Greek loans so that Greece’s gross financing needs are below 15 percent of GDP after 2018 for the medium term, and below 20 percent of GDP later.

It also said at the time it would consider replacing more costly IMF loans to Greece with cheaper euro zone credit and transfer the profits made from a portfolio of Greek bonds bought by euro zone national central banks back to Athens.

But all that could happen only if Greece delivered on its reforms by mid-2018 and only if an analysis showed Athens needed the debt relief to make its debt sustainable.

A third scenario, C, is a compromise between A and B, assuming average economic growth of 1.25 percent, a primary surplus of 3.5 percent until 2022, easing more gradually thereafter to averages 1.8 percent, rather than 2.2 percent in 2023-2060.

Under this scenario, Greek debt could be made sustainable with an extension of euro zone weighted average loan maturities by 15 years with the last loans maturing in 2080, the capping of interest on loans at 1 percent until 2050 and setting the amortization cap at 0.4 percent of Greek GDP.

Reporting By Jan Strupczewski; Editing by Gareth Jones