Greece’s financing needs are projected to reach about 50 billion euros from October 2015 to end-2018, which would require a fresh cash injection by Europe of at least 36 billion euros over the three-year period, the International Monetary Fund said on Thursday, adding that unless Greece meets a growth rate over 1 percent per year and the primary surplus target is set at under 3 percent of GDP, a haircut would be needed.
The findings of the IMF’s latest Debt Sustainability Analysis are seen triggering new tensions with European institutions, who believe that the Greek debt is sustainable, and particularly as the reports, dated June 26, was published during a particularly sensitive period, just days before Greeks head to the polls to vote in favor or against the institutions’ proposal for a bailout agreement.
Moreover, it is also likely that the IMF report will provide a boost to the Greek government’s demand for debt relief as one of the main terms of any agreement with creditors.
The IMF, however, notes that if the program, which expired on Tuesday, had been implemented as specified at the last review, debt servicing would have been within the recommended threshold of 15 percent of GDP on average during 2016-45. This would require primary surpluses of over 4 percent of GDP per year and decisive and full implementation of structural reforms that would deliver a steady state growth of 2 percent per year and privatizations.
What if growth were lower – closer to the historical pattern of about 1 percent per year? What if primary surplus targets could not exceed 3 percent of GDP over the medium term?
The IMF says that lowering the primary surplus target even further in a low growth environment would imply unsustainable debt dynamics. “In such a case, a haircut would be needed, along with extended concessional financing with fixed interest rates locked at current levels,” the report says.
It adds that a lower medium-term primary surplus of 2.5 percent of GDP and lower real GDP growth of 1 percent per year would require not only concessional financing with fixed interest rates through 2020 to cover gaps and a doubling of the grace period and maturities on the existing debt, but also a significant debt writedown. This, for instance, could consist of a full write-off of the stock outstanding in the GLF facility (the loans of the first bailout program or 53.1 billion euros) or any other similar operation. The debt-to-GDP ratio would post an immediate decline but plateau afterwards amid low economic growth and reduced primary surpluses. The stock and flow treatment, nevertheless, are able to bring the GFN-to-GDP trajectory back to safe ranges for the next three decades.
The baseline scenario, according to IMF, sees Greece’s financing needs adding up to over 50 billion euros over the three-year period from October 2015 to end–2018. It is assumed that the Greek authorities would be in a position to complete the prior actions by September and that the necessary assurances on financing and debt sustainability are in place. Financing needs until then could be met with European funds that have already been committed, including the temporary use of about 6 billion euros from the HFSF buffer. The 12-month forward financing requirements from October 2015 onward amount to around 29 billion euros. This includes a buffer for bank recapitalization, pending a comprehensive assessment of capital needs, in view of high non-performing loans in the banking sector.
Financing needs for the three-year period from October 2015 to December 2018 are estimated to come to about 52 billion euros. The amount and timing of Fund disbursements will be determined by the IMF’s Executive Board. However, it is assumed, in line with the practice in eurozone programs, that the European partners will cover at least two-thirds of the financing needs.
The IMF sees it as unlikely that Greece will be able to close its financing gaps from the markets on terms that are consistent with debt sustainability. The central issue is that public debt cannot migrate back onto the balance sheet of the private sector at rates consistent with debt sustainability, until debt-to-GDP is much lower with correspondingly lower risk premiums. Therefore, it is imperative for debt sustainability that the euro area member states provide additional resources of at least 36 billion euros on highly concessional terms to fully cover the financing needs through end-2018, in the context of a third EU program.
Even with concessional financing through 2018, debt would remain very high for decades and highly vulnerable to shocks. Assuming official (concessional) financing through end-2018, the debt-to-GDP ratio is projected at about 150 percent in 2020, and close to 140 percent in 2022. Using the thresholds agreed in November 2012, a haircut that yields a reduction in debt of over 30 percent of GDP would be required to meet the November 2012 debt targets. With debt remaining very high, any further deterioration in growth rates or in the medium-term primary surplus relative to the revised baseline scenario discussed here would result in significant increases in debt and gross financing needs. This points to the high vulnerability of the debt dynamics.
The IMF is a draft Debt Sustainability Analysis (DSA) prepared by the staff of the Fund in the course of policy discussions with the Greek authorities in recent weeks.
It has not been agreed with the other parties in the policy discussions nor discussed with or approved by the IMF’s Executive Board. Since it was drafted, the Greek authorities have closed the banking sector, imposed capital controls and incurred arrears to the Fund. These developments are likely to have a significant adverse economic and financial impact that has not yet been reflected in this draft DSA.
Note that the financing for the coming months assumed European support before the second European program expired. Also, the amount of IMF disbursements going forward will be decided by the IMF Executive Board. Greece is precluded from these resources unless it clears all arrears to the Fund in full.