Every step Greece takes to shore up its finances seems to make it harder for Athens to make the numbers add up in the long-term, especially when it comes to its spiralling debt.
Monday’s 2013 budget plan contained some positive news – for example, the expectation that Greece will have a primary budget surplus, before debt financing costs, for the first time since 2002 – as well as some more alarming forecasts.
Chief among those was an acknowledgement that the economy will shrink again next year, by 3.8 percent, the sixth annual contraction in succession, and that the debt-to-GDP ratio will rise to 179.3 percent in 2013, a dauntingly high figure.
The bottom line is that Greece is in a worse state now than even the most pessimistic forecast just six months ago.
The relationship between growth and debt is the focus of the European Commission, the European Central Bank and the International Monetary Fund — the troika of inspectors currently in Athens poring over the government’s projections.
In the coming 4-6 weeks, the troika will publish its latest report assessing whether Greece’s debt is sustainable in the longer-term, something many private sector economists have already concluded is not the case.
In its last analysis published in March, the troika said Greece needed to get its debts down to 120 percent of GDP by 2020 for the situation to be manageable and concluded the goal was achievable under certain optimistic assumptions.
But as so often with the Greek economy in the past three years, most of the assumptions are already way off-target and the likelihood of Athens meeting the 2020 goal is now even slimmer than it was then.
That makes it all the more likely that Athens will have to go through another debt restructuring, involving further losses for bondholders, if it is to return to solvency. And this time it is the official sector — mostly European governments and their taxpayers — who will have to take a hit rather than the private sector.
That would be a major blow to German Chancellor Angela Merkel, whose country is the biggest contributor to eurozone rescue funds, and diplomats say she would be eager to avoid such an event before a September 2013 German general election.
“Debt reduction will still require a herculean domestic fiscal adjustment,» JP Morgan said in an analysis of Greece’s deteriorating debt predicament back in July.
“The upshot of this arrangement is that the inevitable decisions on burden-sharing that lie ahead will relate to official creditors and Greek citizens,» it said, noting 70 percent of Greek debt would be in official sector hands by 2014.
Perhaps the clearest illustration of how far Greece has strayed in the past six months — during which time it has held two elections and so far failed to push through the legislation needed to cut spending and raise revenue — is set out in black and white in the troika’s 10-page analysis from March.
In that report, written just after private investors took a 70 percent writedown on their Greek bond portfolios, the EU/IMF inspectors said they expected public debt to peak at 170 percent of GDP in 2014 under a worst-case scenario.
Wisely, they added a proviso: «The debt trajectory is extremely sensitive to programme delays, suggesting that the programme could be accident prone, where sustainability could come into question.”
Indeed, the debt next year is now forecast to be 10 percentage points higher than even the worst-case figure, and could go on rising in 2014, depending on whether grow returns.
“It’s an extremely ugly picture,» said an EU economic adviser responsible for coming up with solutions to the crisis.
“The truth is, everyone knows Greece needs another debt restructuring but no one wants to acknowledge it right now because the contagion impact remains.”
A further concern is that even if Greece were magically to get its debt down to 120 percent of GDP by 2020 — an adjustment of around 120 billion euros in seven years — there’s no hard-and-fast rule that says it will then be sustainable.
For some countries with low growth, a debt level of 90 percent of GDP is hard to sustain. Others, such as Japan, can survive with debts approaching 200 percent of GDP.
“When it comes to Greece, we just used 120 percent because that’s where Italy’s debt level was at the time and Italy had managed to sustain it,» an EU official closely familiar with the troika’s work told Reuters.
In fact, some troika officials believe they should have set Greece’s debt-sustainability level at 100 percent of GDP or below, but altering the target now is unlikely.
The question is when will officials acknowledge that Greece just cannot meet its obligations and will have to restructure.
The critical moment will come when the troika delivers its report, which was originally expected in September and is now not likely to be finalised before the end of this month.
Several EU diplomats and other officials told Reuters last month that discreet pressure was being applied on the troika to hold off until after the U.S. election on Nov. 6, in large part because leaders want to avoid anything that could rattle the world economy ahead of the vote.
When the report is finally released, either the troika will have to bite the bullet and give an unvarnished assessment of Greece’s situation, or it will try to massage the situation and set out various scenarios.
Most economists and diplomats following the process expect the latter, which is likely only to buy time until the true picture emerges and another debt restructuring is necessary.