Eurozone study says Greek debt can easily derail again
Package worth 130 billion euros is to avert chaotic default in March
BRUSSELS: Greece’s second bailout programme could easily go off the rails and send the nation’s debt rocketing back to unmanageable levels, according to a confidential study by its international lenders.
The nine-page debt sustainability analysis, on which eurozone finance ministers based their decision yesterday to approve a 130-billion euro rescue programme, is anything but a vote of confidence in Athens’ ability to put its public finances back on a sound footing.
Indeed the report, dated Feb 15 and first obtained by Reuters on Monday, described in the disembodied prose of economic bureaucrats how uncertain Greece’s recovery would remain for many years, and how Athens would likely need international aid for an indefinite period.
Experts from the European Commission, the European Central Bank (ECB) and the International Monetary Fund highlighted the risks and questioned the assumption that Greece would be able to return to capital markets in the coming years.
“There is a fundamental tension between the programme objectives of reducing debt and improving competitiveness, in that the internal devaluation needed to restore Greece’s competitiveness will inevitably lead to a higher debt to gross domestic product (GDP) ratio in the near term,” the analysis said.
“Given the risks, the Greek programme may thus remain accidentprone, with questions about sustainability hanging over it.”
The authors voiced particular concern that continued delays in unpopular structural economic reforms and privatisations could further deepen a recession now in its fifth year.
“This would result in a much higher debt trajectory, leaving debt as high as 160% of GDP in 2020.”
That is roughly the current level, before an agreed write-down of about 53.5% of the face value of bonds held by private investors, which with other measures is due to cut the debt to 120.5% in 2020. Eurozone finance ministers cut the interest rate on official loans to Greece, forced private bondholders to accept deeper losses and agreed to harness ECB profits on Greek bonds to make the numbers add up.
But the analysis cautioned that Greece may veer off the central scenario on which those figures are based if it is unable to implement all the necessary changes quickly enough. – Reuters
BRUSSELS: Eurozone finance ministers has sealed a 130-billion-euro (Us$172bil) bailout for Greece to avert a chaotic default in March after persuading private bondholders to take greater losses and Athens to commit to deep cuts.
After 13 hours of talks, ministers finalised measures to cut Greece’s debt to 120.5% of gross domestic product by 2020, a fraction above the target, to secure its second rescue in less than two years and meet a bond repayment next month.
By agreeing that the European Central Bank (ECB) would distribute its profits from bond buying and private bondholders would take more losses, the ministers reduced the debt to a point that should secure funding from the International Monetary Fund (IMF) and help shore up the 17-country currency bloc.
But the austerity measures wrought from Greece are widely unpopular among the population and may hold difficulties for a country which is due to hold an election in April. Further protests could test politicians’ commitment to cuts in wages, pensions and jobs.
Every government in the currency union will also have to approve the package. Northern creditors, such as Germany, had pressed for even tougher measures to be placed on Greece, but Finance Minister Wolfgang Schaeuble said he was very confident a majority in parliament would approve the package.
“We have reached a far-reaching agreement on Greece’s new programme and private sector involvement that would lead to a significant debt reduction for Greece ... to secure Greece’s future in the euro area,” Jean-claude Juncker, who chairs the Eurogroup of finance ministers, told a news conference.
The euro gained in Asia after the bailout was agreed.
Some economists said there were still questions over whether Greece could pay off even a reduced debt burden.
A return to economic growth could take as much as a decade, a prospect that brought thousands of Greeks onto the streets to protest on Sunday. The cuts will deepen a recession already in its fifth year, hurting government revenues.
“We sowed the wind, now we reap the whirlwind,” said Vassilis Korkidis, head of the Greek Commerce Confederation. “The new bailout is selling us time and hope at a very high price, while it doggedly continues to impose harsh austerity measures that keep us in a long and deep recession.”
A report prepared by experts from the European Union, ECB and IMF said Greece would need extra relief to cut its debts near to the official debt target, given the worsening state of its economy.
If Athens did not follow through on economic reforms and savings to make its economy more competitive, its debt could hit 160% by 2020, said the report, obtained by Reuters.
“Given the risks, the Greek programme may thus remain accidentprone, with questions about sustainability hanging over it,” the ninepage confidential report said.
The accord will enable Athens to launch a bond swap with private investors to help put it on a more stable financial footing and keep it inside the eurozone.