Greece has moved a step away from bankruptcy with parliament’s approval of new reforms, but its debt pile still threatens its solvency and its international creditors have yet to agree even how big it is.
Inspectors from the European Commission, the European Central Bank and the International Monetary Fund — together known as the troika — have been in Athens on and off since July trying to establish whether Greece will ever be able to pay back everything it owes.
With total debt estimated at 175 percent of GDP and forecast to rise to nearly 190 percent next year, it is extremely unlikely that the government will be able to reduce the ratio to 120 percent by 2020, the level the IMF has said is the maximum for debts to be sustainable in the long-term.
Reuters reported in July, on the day the troika returned to Athens, that Greece was way off-track in meeting the goal, with the first estimates by the troika showing the debt would be at least 130 percent of GDP in 2020.
Three months on, there is no evidence that the situation has improved, with officials telling Reuters the IMF and European Commission have made widely differing calculations, even if both acknowledge that the 2020 goal won’t be reached.
One euro zone official said there was a difference of up to 20 percentage points between the IMF’s estimates and those of the Commission, with the Commission more optimistic. That gap is equivalent to around 40 billion euros.
The international stand-off threatens to further delay the next 31.5 billion euro-tranche of Greece’s second international bailout, pushing the country close to bankruptcy again.
“The real issue now is within the troika itself,» said the official. «They cannot agree.”
The bailout, agreed in March, was frozen by elections and slow reforms. After a narrow vote on Thursday to approve an austerity package, the Greek parliament must pass a tough 2013 budget in a vote due on Sunday before it can be restarted.
A deal must also be reached on how to reduce the debt and before that, everyone must agree how big it is likely to get.
Athens says it needs the tranche before the end of next week. Euro zone officials say it could survive without it a bit longer, but not indefinitely.
Another source familiar with the troika discussions said no single number for the debt had been produced, with a range of possible outcomes depending on the economic assumptions made — as is normal when long-term economic forecasts are made.
“There was disagreement on the numbers,» the source said of the latest troika discussions, saying there was a difference of at least 10 percentage points between the EU and the IMF.
“Everybody agreed it would be way above 120 percent of GDP, but by how much was something that the IMF and the two EU parts of the troika disagreed upon.”
If Greek debt cannot be brought down to 120 percent by 2020 — or close to that figure within a couple of years of the deadline — the IMF may have to withdraw from the bailout, sending Greece and the wider euro zone into renewed turmoil.
ANOTHER DEBT OVERHAUL?
As a result, more radical options are now being explored for reducing the debt burden more aggressively, although few of the ideas are palatable to all of the troika: either the IMF or the ECB or euro zone creditors have a problem.
One option, which does have broad support, is to further lower the interest rate on loans made to Greece and extend the repayment time until the economy is healthy again.
There is general agreement on such a step, finance officials say, and a decision is expected along those lines in the coming weeks. But while positive for Athens, it won’t be sufficient to bring the debt ratio down to an acceptable level.
A further step would be for the ECB, which has bought about 38 billion euros of Greek bonds over the past three years, to forego any profit on those bonds — returning what it makes on them to national central banks and ultimately to Greece.
Since the bonds were bought at a deep discount, it is estimated that such a step could save Greece around 12 billion euros, depending on what price is struck in the market.
Reuters first reported on such an option in July, although sources said at the time that it was too early for any decision to be taken on such a sensitive issue.
The ECB foregoing its profits may also not be sufficient to close the debt gap, however. That would leave two or three other options open to the euro zone and the IMF.
One would be for euro zone member states, which have made loans totalling 127 billion euros to Greece under the two bailout programmes, to write off a portion of those loans — a process referred to as OSI, or official sector involvement.
The IMF has advocated OSI, but for member states it would mean passing losses directly on to taxpayers — something EU leaders have always told voters would not happen and for that reason it would appear to be the last-ditch choice.
German Finance Minister Wolfgang Schaeuble said last month that OSI would not be legally possible for euro zone countries.
Another proposal is for Greece to borrow money at low rates from the euro zone rescue fund and use it to buy back some of its debt, which is trading at very low prices — an option Germany is willing to explore.
In theory such a move would reduce Athens’ funding costs and make the debt more sustainable. Schaeuble has given it his backing, but the IMF is opposed, concerned that buyback schemes can simply defer the problem.
The net result is that Greece still has a mountain to climb and no easy options for putting its debt on a sustainable footing. What is more, there is no guarantee that if it can reduce debt to 120 percent of GDP it is out of the woods.
The 120 percent figure was fixed on because Italy had debts of 120 percent of GDP at the time and was managing okay. But Italy is a very different case to Greece, with high domestic ownership of its debt, and its situation is now less stable.