Debt bur­den is ‘un­sus­tain­able’

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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