Dr. Platon Chief Market Economist, Deputy General Manager, Eurobank Ergasias S.A.,
Greece Macro Monitor (4 May 2017)
How much relief is actually needed to restore public debt sustainability
Summary of views
Contrasting the views of the IMF and the EU institutions on Greek public debt
Sustainability through the lens of the IMF staff (Article IV – February, 2017)
Gross financing needs (GFN) as percent of GDP expected to cross the 15% threshold already by 2024 and the 20% threshold by 2031, reaching around 62% by 2060
This renders Greece’s public debt ratio highly unsustainable in the medium- & long-term (projected to reach 275% of GDP by 2060), despite generous large-scale flow relief received thus far
This unsustainable trajectory is attributed to: a) downward revisions in the medium- and long-term forecasts for GDP growth and the general government primary balance; and b) the fact that, after 2018, Greece will need to re-access market financing and thus, roll over maturing debt at interest rates significantly higher than the current (concessional) ones paid on official loans
In order to address the issue of sustainability, the Fund’s revised debt sustainability analysis (DSA) has presented an indicative debt relief package (OSI) which would ostensibly be adequate to broadly keep Greece’s GFN ratio to levels no higher that 15% of GDP during the post-programme period for the medium-term and 20% of GDP in outer years
In view of the aforementioned, the IMF has stressed the need to bring forward significant debt relief (i.e., even before the expiration of the current programme, in a gradual/conditional manner) so as to facilitate a swift restoration of investor confidence towards Greece
The views of the EU institutions (European Commission, Compliance Report, June 2016)
In their latest (June 2016) DSA for Greece, the European Commission portrayed a more optimistic view than that of the IMF on the basis of more benign assumptions regarding the future path of the general government primary balance as well as the medium- and long-term growth outlook of the Greek economy
Nevertheless, the Commission’s analysis concluded that the projected evolution of Greece’s public debt and gross financing needs ratios point to serious sustainability-related concerns that shall be addressed through the
implementation of the far-reaching reforms, strong reforms ownership by the Greek authorities and debt-mitigating measures granted upon full implementation of the conditionality agreed in the context of the ESM programme
The view of the IMF staff (Article IV – February, 2017)
In the IMF’s latest (Jan./Feb. 2017) Article IV report, the modalities of an indicative relief package to reinstate public debt sustainability are presented. This involves: a) significant maturity extensions, between 10 and 30 years; b) longer deferrals of interest and principal payments, between 6 and 21 years; c) fixing the interest rates at pretty concessional levels i.e., 1.5% per year until 2040 and 3.8% afterwards; and d) returning to Greece the profits accrued from 2019 onwards to the Eurosystem’s ANFA and SMP portfolios plus a relevant amount of €1.8bn, which is pending from 2014
Importantly, the aforementioned relief structure involves all European loans given to Greece; that is, all loans that have already been disbursed under the three bailout programmes, or will be disbursed under the present ESM facility
Debt relief framework for Greece agreed at the Eurogroup of May 25, 2016
At the Eurogroup of May 2016, the European creditors have agreed on a short-, medium- and long-term debt relief framework that will be subject to the pre-defined conditionality of the ESM programme and will be phased in progressively so as to ensure that Greek public debt remains sustainable under the new operational definition of sustainability
The modalities of the short-term leg of the said framework were unveiled last December (and the relevant interventions are already in their implementation stage), while the medium- and long-term measures are to start being implemented upon the successful completion of the present ESM programme i.e., after August 2018
Importantly, the scope and modalities of the medium- and long-term debt relief framework do not appear adequate enough to fully restore the sustainability of Greek public debt under significantly more downbeat macro assumptions than these assumed in the latest DSA analysis published by the European institutions (June 2016); that is, unless the aforementioned framework is probably implemented in its most radical and far-reaching form
In support of the aforementioned, we note that a significant part of debt relief implied by the existing medium- and longterm framework is projected to come from some targeted reprofiling of the EFSF loans (c. 60% of all EU loans disbursed thus far and c. 52% of the latter plus the new ESM loans that are expected to be disbursed under the current programme – all in notional terms), without incurring any additional costs for former programme countries or to the EFSF
On the other hand, the existing framework does not envisage any interventions in/reprofiling of the remaining package of EU loans to Greece (GLF facility & ESM)
A key takeaway from the aforementioned analysis that relates to the ongoing discussions between the European creditors and the IMF on additional debt relief for Greece is as follows: the views of the two sides on a) the baseline macroeconomic assumptions underlying their respective debt sustainability analyses and/or b) the modalities and scope of debt relief that can be provided to Greece in the medium- and long-run should converge more substantially to facilitate the Fund’s financial participation in the present programme
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