Three conditions to render Greek debt sustainable

There are three key conditions that, if fulfilled, could render the Greek public debt sustainable without needing a second bond haircut, according to a Finance Ministry plan.

The preliminary macroeconomic model, prepared with the contribution of the Foundation for Economic and Industrial Research (IOBE), was presented at a meeting last week between Finance Ministry officials and the representatives of the European Commission, the European Central Bank and the International Monetary Fund in Athens — known as the troika.

For the Greek debt to be reduced without a second state bond haircut — which would this time involve the official sector, something that the European Central Bank is opposed to — there are three main conditions that are required, the Greek officials told the troika.

The basic requirement for the economy to stage a rebound is an improvement in the domain of non-housing private investment. If that happens, the ministry forecasts that the economy will achieve a growth rate of between 0 and 1 percent in 2014. According to the special task force the Finance Ministry has appointed, an increase in private expenditure is a sine qua non for state finances to pick up in Greece. The model that the task force has created shows that the course of the country?s gross domestic product is heavily dependent on the level of private investment.

It has been confirmed that if private investment (excluding spending on housing) reverted to the growth rate seen during the decade starting in 2000 — which is considered feasible given the current state of the Greek economy — then the country?s GDP would grow by about 0.5 percent annually. If this forecast on private investment turns out to be true, then the public debt could shrink by 13-15 percent of GDP by 2020 on this factor alone.

The second condition is the full realization of the targets set by the privatizations program. According to the government?s plans, some 19 billion euros needs to come into the state coffers by 2015 from this program, rising to 50 billion euros by 2020.

The third condition for the sustainability of Greek debt is the recapitalization of the local credit system through the European Support Mechanism (ESM) and the exclusion of the sum of about 30 billion euros used for that purpose from the public debt.

It is no coincidence that a preliminary draft of the report prepared by the ministry?s task force forecasts that if growth is higher than the current estimates, the fiscal adjustment could be achieved by 2016, and if 34 billion euros (that will possibly be required for the bank recapitalization) is written off the state debt, then the latter could drop to just 109 percent of GDP in 2020.

The task force is continuing its work on drafting the report on Greek debt sustainability and has concluded that if nothing changes in the streamlining program, the Greek debt could grow to 140 percent of GDP in 2020, against an original target for 120 percent.

As far as the macroeconomic model that the Greek side presented to the troika is concerned, the economy is expected to contract by 6 percent this year and 3 percent in 2013, before reverting to growth in 2014 at a rate of up to 1 percent.

Using these estimates as the main parameters, the ministry has also made projections regarding the course of the state budget?s primary deficit. If all measures required to meet the targets of the program are taken, the budget deficit excluding loan payments will come to 1.5 percent of GDP this year, drop to zero next year and revert to a primary surplus in 2014, at 1.5 percent of GDP, and in 2015, at 3 percent of GDP, the task force expects.

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