A day before Tuesday’s crucial Eurogroup, the International Monetary Fund issued its own Debt Sustainability Analysis (DSA), proposing measures that could reduce the Greek national debt by up to 50 percent of gross domestic product up to 2060, while making it clear that the existing targets of the Greek program cannot be implemented. The IMF said that is because Athens will not implement the necessary austerity measures and required reforms.
The Fund openly disputes the country’s capacity to keep posting primary budget surpluses of 3.5 percent of GDP in the long term. “Even if Greece through a heroic effort could temporarily reach a surplus close to 3.5 percent of GDP, few countries have managed to reach and sustain such high levels of primary balances for a decade or more,” according to the DSA. And Greece is unlikely to manage that, it adds. Therefore the IMF is insisting that the primary surplus target be lowered to 1.5 percent of GDP.
The report also notes that for the Greek debt to be seen as sustainable, the country’s funding requirements for debt servicing will have to be below 10 percent of GDP by 2040 and below 20 percent by 2060. The eurozone has said that the sustainability criterion for the Greece’s arrears is that the yearly cost of servicing them does not exceed 15 percent of GDP.
The IMF estimates that the debt will amount to 250 percent of GDP in 2060, when the funding needs of the country amount to 60 percent. For the problem to be tackled, the Fund is proposing three measures. The first concerns extending the repayment time of the loans from the European Financial Stability Facility (EFSF), the European Stability Mechanism (ESM) and the bilateral loans by up to 14 years. The second measure is to extend the grace period for the repayment of the ESM loans by six years, of the EFSF loans by 17 years and of the bilateral loans by 24 years. The third involves fixing the interest rates at 1.5 percent up to 2040 for the ESF and ESM loans and the exclusion of the additional Euribor rate that Greece pays for the bilateral loans.
The Fund concedes that all this will lead to losses for the ESM, which it says the eurozone countries must cover in some fashion. The IMF calculates that those measures would reduce Greece’s debt by 53 percent of GDP by 2040 and by 151 percent of GDP by 2060.