New calculations by the Finance Ministry show that Greece’s state debt will drop below 110 percent of gross domestic product in 2022 due to a number of factors, offering the government one more arrow in its quiver when it comes to discussing the lowering of the fiscal barrier. That would remove the need for very ambitious primary surplus targets and allow for their substantial change.
The most recent official estimate by the International Monetary Fund was that the debt would fall to 117.2 percent of GDP in eight years’ time, while the European Commission forecast it would come to 112 percent.
However the ministry now expects the debt/GDP rate to drop further still thanks to the reduction in the cost of treasury bills and the funds set aside for the banks’ recapitalization that will be left unused.
The forecasts regarding the course of the Greek state debt had been made on the basis of the average cost of borrowing from T-bills at an interest rate of 4.5 percent. Now the state draws liquidity from T-bills at an interest rate of 2 percent. That means that there will be savings of 380 million euros from the repayment of interest on an annual basis, which will reduce the public debt. Similarly, the revision of the total future cost of borrowing for the state will be must lower than previously.
The funds from the reserve of the Hellenic Financial Stability Facility (HFSF) for the support of the local credit sector that will not be utilized can be returned and therefore will lead to the reduction of the state debt by the same amount. At the moment the HFSF has 11 billion euros at its disposal and it is estimated that a significant share of that could be returned to improve the sustainability of the Greek public debt. After all, the bailout agreement provides for any funds that are not required by banks to be returned unless there is a new deal between the government and its creditors determining another purpose for them.
Given the above the government anticipates that the state debt will be significantly below 110 percent of GDP by 2022 without revising the macroeconomic and fiscal targets at all – i.e. leaving the forecasts for economic growth rates in the coming years and the ambitious primary surplus targets unchanged.
The program provides for a primary surplus of 3 percent of GDP for next year, 4.5 percent in 2016 and 2017, 4.2 percent every year from 2018 to 2020 and 4 percent in 2021 and 2022. These targets had been set to ensure the reduction of the debt to sustainable levels, but now that this will be achieved via other favorable factors there is another argument in favor of lowering these barriers.