Eurozone debt relief for Greece has made its huge public debt sustainable over the medium term, but optimistic assumptions on Greek growth and primary surplus well into the future are making debt sustainability uncertain in the long-term, the IMF said.
The International Monetary Fund published its debt sustainability analysis for Greece on Tuesday showing significant differences with the one that eurozone countries used to put together their debt relief offer for Athens in June.
“The debt relief recently agreed with Greece’s European partners has significantly improved debt sustainability over the medium term, but longer-term prospects remain uncertain,” the IMF report on Greece said.
“Staff is concerned, however, that this improvement in debt indicators can only be sustained over the long run under what appear to be very ambitious assumptions about GDP growth and Greece’s ability to run large primary fiscal surpluses, suggesting that it could be difficult to sustain market access over the longer run without further debt relief,” it said.
The IMF pointed out that Greece may have a problem achieving annual nominal GDP growth of 3.1 percent on average between now and 2060 or a primary surplus — the budget balance before debt servicing — of 2.4 percent of GDP in the same period.
The IMF said its own assumptions of growth of 2.9 percent and a primary surplus of 1.8 percent on average in that period made more sense.
In its analysis, the IMF also assumed higher market interest rates than the eurozone did and higher interest charged by the euro zone bailout fund that owns much of Greek public debt.
The Fund analysis showed that with the debt relief package provided by the eurozone in June, Greece’s debt-to-GDP ratio would initially fall but then start an uninterrupted rise from around 2038.
Also the country’s gross financing needs would breach the 20 percent of GDP threshold set by the euro zone itself by 2038 and continue rising thereafter.
“Therefore, additional relief would be needed to secure debt sustainability,” the IMF said, noting that if the more optimistic euro zone assumptions on growth and primary surplus were correct, no additional debt relief would be needed.
The Fund said that Greece’s impressive fiscal tightening so far has been a result of a growth-unfriendly policy mix, which would need to be significantly changed if growth were to be robust and sustainable in the long-term.
It said that specifically Greece had to boost capital and other discretionary spending and cut the already high taxes while significantly cutting unsustainably high pension spending substantially broadening its very narrow tax base.
“In view of Greece’s very large structural unemployment and weak policy-making institutions, staff believes that it will be difficult to undertake such politically difficult changes while at the same time maintaining exceptionally high primary surpluses for a very extended period,” the IMF said.
The Fund said a euro zone promise to provide more debt relief to Greece in the future, if necessary, was a good sign for those who wanted to invest in Greece in general, providing some reassurance in case things would go wrong.
But it also noted that the promise was conditional on Athens sticking to the “very ambitious” primary surplus goals and was also vulnerable to political changes in euro zone countries over the next 40 years that could undermine the pledge.
“This in turn suggests that the commitment to provide additional relief if needed may be insufficient to mitigate the long-term risks, and that Greece, therefore, could struggle to maintain market access over the long run,” the IMF said. [Reuters]