Greek debt analysis shows serious concerns over its sustainability

There are serious concerns about the long-term sustainability of Greek debt, a document prepared by the euro zone's bailout fund showed on Monday, as finance ministers started a discussion how to make Greece's debt servicing costs manageable.

The document, prepared by the European Stability Mechanism (ESM) for the Monday talks of euro zone finance ministers, says that under the main scenario, Greece's economic growth would be 3.1 pct in 2018, 2.8 pct in 2019, 2.5 pct in 2020, 1.5 pct in 2025 and 1.3 pct from 2030 to 2060.

Under this base scenario, Athens would maintain a 3.5 percent of GDP primary budget surplus from 2018 until 2025. After that it would start declining to stay at 1.5 pct in 2040-2060.

Based on the ESM document, euro zone deputy finance ministers will work on various debt relief steps for Greece over the next two weeks and present their findings to euro zone finance ministers on May 24.

If the main ESM scenario were to prove accurate, the euro zone, Greece's main lender, could achieve Greek debt sustainability through three actions:

– the extension of the maximum weighted maturity by 5 years to 37.5 years

– a re-profiling of the amortisation scheme by setting loan repayments as 1 percent of GDP until 2050 and linearly amortised after that

– a capping of interest charged to Greece at 2 percent, with any interest that would have been payable in excess of the 2 percent being deferred until 2050. The accumulated and capitalised deferred interest would then be repaid in equal instalments.

The document, obtained by Reuters, also said that possible other measures included returning to Athens profits generated by the European Central Bank on its Greek bond holdings until 2026, which would add up to around 8 billion euros.

Another possible measure could be to repay Greece's loans to the International Monetary Fund early because they are much more expensive than ESM loans.

The ESM could buy out the IMF loans using unspent money from the Greek bailout, because the fund spent some 20 billion euros less than expected on Greek bank recapitalisation.

The ESM assumed in its analysis that the IMF would disburse 6 billion euros to Greece under the next bailout, taking the total Athens would owe the Fund in 2018 — at the end of the bailout — at 17.6 billion euros.

The debt analysis said that under this main scenario, Greece's annual debt servicing costs could remain below 15 percent of GDP until late 2030s and below 20 percent afterwards.

"More adverse scenarios than the baseline one would require more far-reaching measures to attain debt sustainability," the document said.

It said that under a scenario of weaker growth and a faster decline in the primary surplus than in the base scenario, the euro zone would need to extend average maturities of loans to Greece by 10 years or more and combine that with the return of bond profits from the ECB and the IMF buy-out.

[Reuters]