No Greek debt relief needed if primary surplus is above 3%/GDP for 20 years: paper

BERLIN (Reuters) – Greece will not need any debt relief from eurozone governments if it keeps its primary surplus above 3% of GDP for 20 years, according to a confidential document prepared by the fund. Eurozone bailout, the European Stability Mechanism (ESM), shown.

A Greek national flag flies as the moon rises in Athens, Greece February 9, 2017. REUTERS/Alkis Konstantinidis

The document, obtained by Reuters, was prepared for eurozone finance ministers and International Monetary Fund talks last Monday, which ended without an agreement due to divergent IMF and eurozone growth assumptions. and Greece’s future surpluses.

A group of eurozone finance ministers led by Germany’s Wolfgang Schaeuble insists that the question of whether Greece needs debt relief can only be decided when the last rescue plan in mid-2018.

The IMF says the need for a bailout is already clear now.

In Scenario A, the paper assumes that no debt relief would be needed if Athens kept the primary surplus – the budget balance before debt service – at or above 3.5% of gross domestic product. until 2032 and above 3% until 2038.

The European Central Bank says such long periods of high surpluses are not unprecedented: Finland, for example, had an 11-year primary surplus of 5.7% in 1998-2008 and Denmark 5.3% over 26 years in 1983-2008.

A second option in Scenario A assumes that Greece gets the maximum possible debt relief under a May 2016 deal.

Greece should then maintain its primary surplus at 3.5% until 2022 but could then reduce it to around 2% until the mid-2030s and 1.5% by 2048, an average of 2, 2% in 2023-2060.


The document says the maximum possible debt relief envisaged is an extension of the weighted average loan maturities by 17.5 years from the current 32.5 years, with the last loans maturing in 2080.

The ESM would also limit Greek loan repayments to 0.4% of Greek GDP until 2050 and cap the interest rate charged on loans at 1% until 2050.

Any interest payable above this 1% would be deferred until 2050 and the deferred amount capitalized at the cost of financing the bailout fund.

The ESM would also buy back in 2019 the 13 billion euros that Greece owes to the IMF because these loans are much more expensive than those of the euro zone.

All of this would keep Greece’s gross financing needs at 13% of GDP until 2060 and raise its debt-to-GDP ratio to 65.4% in 2060, from around 180% currently.

Scenario A assumes average annual economic growth in Greece of 1.3% over the forecast period.

The IMF believes that such assumptions of economic growth and primary surplus are unrealistic in the case of Greece, where policy-making institutions are weak and productivity is low.


Scenario B is based on IMF assumptions of average growth of 1% and a return to a primary surplus of 1.5% from 2023 after five years at 3.5%. This sees Greek debt increase from 2022 and reach 226% in 2060.

Greek banks would then have to be recapitalized and the country’s gross financing needs would exceed, by the end of the 2020s, the ceiling of 15% of GDP promised by the ministers of the euro zone, to reach more than 50% in 2060.

To make Greek debt sustainable under IMF assumptions, the eurozone would have to give Greece more debt relief than was conditionally offered in 2016 – something ministers reject.

In May 2016, the eurozone promised to extend the maturities and grace periods of Greek loans so that Greece’s gross financing needs would be below 15% of GDP after 2018 in the medium term, and below 20% of the GDP later.

He also said at the time that he would consider replacing more expensive IMF loans to Greece with cheaper eurozone credits and transferring the profits made from a portfolio of Greek bonds bought by the national central banks of the euro zone to Athens.

But all of this could only happen if Greece implements its reforms by mid-2018 and only if analysis shows that Athens needs the debt relief to make its debt sustainable.

A third scenario, C, is a compromise between A and B, assuming average economic growth of 1.25%, a primary surplus of 3.5% until 2022, declining more gradually thereafter to averages of 1.8%, instead of 2.2% in 2023-2060.

In this scenario, Greek debt could be made sustainable with a 15-year extension of the weighted average maturities of euro area loans, with the last loans maturing in 2080, the interest cap on loans at 1% until 2050 and the setting of the depreciation cap at 0.4%. of Greek GDP.

Reporting by Jan Strupczewski; Editing by Gareth Jones

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