Debt burden is ‘unsustainable’
stated that debt relief is necessary in Greece, either through “deep upfront haircuts” of official sector debt, “explicit annual transfers to the Greek budget”, or “a very dramatic extension” of grace and repayment periods of official debt, including new assistance. However, several creditor countries believe that official debt forgiveness is incompatible with Eurozone membership. This difference in views is one of the main reasons for the delay in a debt restructuring.
3. In the absence of debt restructuring, the success of a third support programme is doubtful
If the forthcoming support programme is to be based on the ‘prior actions’, it is doubtful that the economy will recover sufficiently to prevent the debt-to-GDP ratio from increasing. The ‘prior actions’ call for a new fiscal path to be centred on a primary surplus target of 1%, 2%, 3%, and 3.5% of GDP for 2015, 2016, 2017, and 2018. Attaining such surpluses will be extremely difficult should the economy in fact decline by -1.0% and -4.0% this year, as expected. The package also calls for value-added tax reforms, among other tax measures, pension reforms, public administration reforms, reforms addressing shortfalls in tax collection enforcement, and other parametric measures. The Parliament has already approved some of these measures, but they have yet to be implemented.
Although DBRS acknowledges that these measures would help long-term growth, in the near term, growth prospects will be subject to even more downside risk.
DBRS shares the IMF’s doubts over whether such a demanding fiscal path can be achieved. In the IMF’s words, “few countries have managed to” [maintain primary surpluses for the next several decades of 3.5% of GDP]. It is likely that once the primary balance is in surplus, the political pressures to ease the target will increase significantly, as has occurred in Greece under the previous two programmes.
Although not
a
direct
catalyst
for
either
a
return
to growth of 2-3%, or the generation of a high primary surplus, a debt restructuring would help in two ways.
First, further lowering the interest rate on official loans and extending maturities would improve Greece’s capacity to pay and help attract private sector financing. The 2012 restructuring did extend the weighted average maturities on Greece’s loans to a very long 15.7 years, and lowered the implicit interest rate to 2.4%, below the Eurozone average of 2.7%. However, Greece remains shut out of private capital markets and is wholly dependent on official sector financing.
Second, Greece is severely limited in its ability to administer further austerity measures. The political opposition to austerity among the ruling Syriza party and some of its allies, was made all the more evident with the decision on July 30 by the Syriza party to hold an emergency congress in September to vote on whether to approve the support programme. Without the full commitment of the Greek government, the programme would almost inevitably fail and an exit from the Eurozone would likely follow.
