## GREECE: AN UPDATE OF IMF STAFF’S PRELIMINARY PUBLIC DEBT SUSTAINABILITY ANALYSIS ## Source details **Canonical URL:** [GREECE: AN UPDATE OF IMF STAFF’S PRELIMINARY PUBLIC DEBT SUSTAINABILITY ANALYSIS](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15186.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15186.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15186.pdf.json) --- ### Main findings on debt dynamics and financing needs - Greece’s public debt has become highly unsustainable. - Financing need through end-2018 is now estimated at Euro 85 billion. - Debt is expected to peak at close to 200 percent of GDP in the next two years, provided that there is an early agreement on a program. - Adjusting the recent DSA mechanically for the banking closure and agreed weaker growth path gives the following main revisions: - Debt would peak at close to 200 percent of GDP in the next two years. This contrasts with earlier projections that the peak in debt—at 177 percent of GDP in 2014—is already behind us. - By 2022, debt is now projected to be at 170 percent of GDP, compared to an estimate of 142 percent of GDP projected in the published DSA. - Gross financing needs would rise to levels well above what they were at the last review (and above the 15 percent of GDP threshold deemed safe) and continue rising in the long term. - The preliminary (mutually agreed) assessment of the three institutions is that total financing need through end-2018 will increase to Euro 85 billion, or some Euro 25 billion above what was projected in the IMF’s published DSA only two weeks ago, largely on account of the estimated need for a larger banking sector backstop for Euro 25 billion. - About a year ago, if program policies had been implemented as agreed, no further debt relief would have been needed to reach the targets under the November 2012 framework (debt of 124 percent of GDP by 2020 and “substantially below” 110 percent of GDP by 2022). - Significant shortfalls in program implementation during the last year led to a significant increase in the financing need—by more than Euro 60 billion—estimated only a few weeks ago. As a result, debt-to-GDP by 2022 was projected to increase from an estimate less than a year ago of about 105 percent to a revised estimate of 142 percent (per the published DSA at that time), significantly above the target of 110 percent of GDP. ### Recent domestic developments worsening prospects - The closure of banks and imposition of capital controls have extracted a heavy toll on the banking system and the economy, leading to a further significant deterioration in debt sustainability relative to the recently published DSA. - The banking system deterioration is a major component of the increased financing need and longer-term debt dynamics. - The proposed additional injection of large-scale support for the banking system would be the third such publicly funded rescue in the last 5 years. Further capital injections could be needed in the future, absent a radical solution to the governance issues at the root of the problems of the Greek banking system. There are at this stage no concrete plans in this regard. ### Key downside risks and critical assumptions - Medium-term primary surplus target: - Greece is expected to maintain primary surpluses for the next several decades of 3.5 percent of GDP. Few countries have managed to do so. - Reversal of key public sector reforms (notably pension and civil service reforms) and lack of specified alternative reforms raise concerns about the ability to reach this target. - The failure to resist political pressures to ease the target when the primary balance swung into surplus also raises doubts about sustainment of such targets. - Growth: - Greece is still assumed to go from the lowest to among the highest productivity growth and labor force participation rates in the euro area, which will require very ambitious and steadfast reforms. - The Government has put on hold key structural reforms and would need to specify strong and credible alternatives in forthcoming program discussions. - Bank support: - Additional capital injections could be needed beyond the proposed Euro 25 billion backstop, absent a radical governance solution for the banking sector. ### Framework considerations and past analytical choices - The earlier published DSA noted that because most of the debt was now owed to official European creditors on non-market terms, a case could be made for changing from the stock-of-debt framework agreed in November 2012 to a framework focused on the path of gross financing needs. - Under that view, haircuts could be avoided if there was a significant further extension of the maturities of the entire stock of European debt (GLF, EFSF), in the form of a doubling of grace and repayment periods, with similarly concessional terms on new financing. - At the core of that conclusion is the premise that public debt cannot be assumed to migrate back onto the balance sheet of the private sector at interest rates consistent with debt sustainability until debt is much lower. Greece cannot return to markets anytime soon at interest rates that it can afford from a medium-term perspective. ### Policy implications and options for debt relief - The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date—and what has been proposed by the ESM. - Options identified include: - Very dramatic maturity extension with grace periods of, say, 30 years on the entire stock of European debt, including new assistance. - Explicit annual transfers to the Greek budget. - Deep upfront haircuts. - The choice between the various options is for Greece and its European partners to decide. - The analysis emphasizes that borrowing at anything but AAA rates in the near term will bring about an unsustainable debt dynamic for the next several decades. *IMF Country Report No. 15/186 — July 14, 2015* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15186.pdf_