Greece is unlikely to be able to pay what it owes and further debt restructuring is likely to be necessary, three EU officials said on Tuesday, a cost that would have to fall on the European Central Bank and euro zone governments.
The officials said that twice bailed-out Greece would be found to be way off track by EU and International Monetary Fund officials who have been assessing the country.
Inspectors from the European Commission, the ECB and the IMF — together known as the troika — returned to Athens on Tuesday and will complete their debt-sustainability analysis next month, but the sources said the conclusions were already becoming clear.
It means Greece’s official-sector creditors — the ECB and euro zone governments — will have to restructure some of the estimated 200 billion euros of Greek government debt they own if Athens is to be put back on a sustainable footing.
But there is no willingness among member states or the ECB to take such dramatic action at this stage.
“Greece is hugely off track,» one of the officials told Reuters, speaking on condition of anonymity because of the sensitivity of the issue. «The debt-sustainability analysis will be pretty terrible.”
Another official pointed to the latest growth estimates from Athens, which show the economy contracting by 7 percent this year rather than the 5 percent previously forecast, meaning that the debt burden is only increasing in relation to GDP.
“Nothing has been done in Greece for the past three or four months,» said the official, referring to the delays caused by the two elections held since May.
“The situation just goes from bad to worse, and with it the debt ratio,» said the official, a policymaker directly involved in trying to find solutions to the crisis.
Under the terms of the second bailout agreement struck with the EU and IMF in February, Greece committed itself to further spending cuts and tax increases in exchange for a 100-billion-euro reduction in its debts.
The restructuring involved private-sector owners of Greek government bonds accepting losses of up to 70 percent on their holdings with the aim of reducing the debt ratio from around 160 percent of GDP to below 120 percent by 2020 – a level the IMF has deemed sustainable in the long-term.
But Greece is significantly far off reaching that 2020 goal, the officials said. One estimated that the overshoot could be up to 10 percentage points, equivalent to around 30 billion euros.
As a result, the IMF could decide to pull out of the second bailout program, having already said that further missed targets would not be acceptable. That would leave euro zone member states and the ECB to bear the cost alone.
In that case, the only way to keep Greece afloat and in the euro zone would be for the ECB and member states to write off some of the Greek debt they own or change the terms to give Athens ever more time to pay back at lower interest rates.
“This has not been explored yet politically because no one wants to launch that discussion,» the first official said. «The political feasibility of carrying out an official-sector restructuring is becoming more and more complicated.”
Even though no formal discussions have begun over so-called official-sector involvement, two possibilities have been mentioned — the ECB taking a writedown on the estimated 40 billion euros of Greek bonds it holds, or member states improving the terms on their loans to Athens.
But the officials Reuters spoke to listed six member states who are firmly opposed to extending Greece further lifelines, not only because of Athens’s persistent missing of targets but because the costs will soon be born directly by taxpayers.
“The political dynamics are really going against the economic dynamics,» one source said. «The economic arguments may be clear – we need to restructure Greece’s debt if it is to be sustainable – but politically there’s no willingness.”
That returns the debate to whether Greece, after 2-1/2 years of crisis and two attempts to overhaul its economy with multi-billion-euro rescues, will stay in the euro zone in the long term.