## _cr15165 - conclusion holds whether one examines the stock of debt under the November 2012 framework or

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---

### Conclusion and key requirement for sustainability
- Debt sustainability with high probability requires Greek policies to "come back on track" and, at a minimum:
  - significant extensions of maturities of existing European loans; and
  - new European financing to meet financing needs over the coming years on similar concessional terms.
- If the package of reforms is weakened further—particularly via a further lowering of primary surplus targets and even weaker structural reforms—haircuts on debt will become necessary.

### A. Background: prior assessment and factors affecting debt dynamics
- At the time of the last review in May 2014:
  - Debt/GDP projected to fall from 175 percent of GDP at end–2013 to about 128 percent of GDP in 2020 and further to 117 percent of GDP in 2022.
  - These projections were above the November 2012 thresholds of debt coming down to 124 percent of GDP in 2020 and to “substantially below” 110 percent of GDP in 2022.
  - Assumptions included medium-term primary surpluses of 4+ percent of GDP and steadfast and timely implementation of structural and financial sector reforms.
  - Debt sustainability risks were very significant; debt could not be considered sustainable with high probability.
- If the program had been implemented as assumed, no further debt relief would have been needed under the November 2012 framework.
- Revisions and other factors since the last review:
  - Lower interest rates:
    - Projected 3-month Euribor declined on average 122 basis points for 2015–22; projected EFSF interest rate declined on average 161 basis points.
    - The medium-term implied interest rate (accrual basis) fell from 3.3 percent to 2.3 percent.
    - Result: projected interest charges during 2014-2022 dropped by nearly 30 percent on an accrual basis.
    - Lower interest rates contributed to a reduction in Greece’s projected debt of €23.5 billion (9.1 percent of GDP) by end–2022 relative to the projections at the last review.
  - Return of the HFSF bank recapitalization buffer to the EFSF at end–February 2015:
    - HFSF buffer: €10.9 billion returned to the EFSF.
    - Interest savings (accrual basis) up to €1.1 billion over 7 years.
    - Projected debt stock in 2022 improved by as much as 4.9 percent of GDP.
  - Use of short-term borrowing from intra-government entities since mid-2014:
    - About €11 billion tapped from local governments, social security funds, and other entities.
    - Rolling over indefinitely about 2/3 of this short-term borrowing (by consolidating into the Treasury Single Account and repaying the rest) would lead to a fall in the 2022 debt-to-GDP ratio by approximately 5 percentage points of GDP.
  - Combined implication: factoring background changes, Greece’s medium-term debt profile would have improved by up to 13 percent of GDP relative to the last review projections.
    - Previously projected debt-to-GDP ratios of 127.7 percent in 2020 and 117.2 percent in 2022 would have declined to 116.5 percent in 2020 and 104.4 percent in 2022 under those favorable assumptions.

### B. Baseline scenario — changes since early 2015 and drivers of higher financing needs
- Aggregate projection:
  - Financing needs projected to reach about €50 billion from October 2015 to end 2018.
  - New European money required over the three-year period: at least €36 billion.
- Main contributors to increased financing needs (relative to the last review):
  - Lower fiscal targets:
    - 2014 primary fiscal balance fell short of program target by 1.5 percent of GDP.
    - Proposed reduction in primary surplus targets from 3 percent of GDP in 2015 and 4.5 percent of GDP in 2016 and beyond to 1 percent of GDP in 2015, 2 percent in 2016, 3 percent in 2017, and 3.5 percent in 2018 onwards would add cumulatively about 7 percentage points of GDP to financing needs during 2015–18.
    - Over the next three years, needs will be €13 billion more from this factor relative to the last review.
  - Lower privatization proceeds:
    - Projected privatization proceeds under the program were €23 billion over 2014–22.
    - Staff assumes annual proceeds of about €500 million over the next few years.
    - This assumption adds about €9 billion to financing needs during 2015–18 relative to the last review.
    - Recommendation: any privatization receipts exceeding the DSA assumptions should be used to pay down debt.
  - Lower economic growth:
    - Staff downgraded the real long-term growth rate by 50 basis points to 1½ percent.
    - Near-term growth assumed in the 2-3 percent range over the next few years.
  - Clearing arrears:
    - Estimated stock of arrears stands at over €7 billion and will need to be cleared.
    - Clearing arrears would add about €5 billion to financing needs during 2015–18 relative to the last review.
  - Rebuilding buffers and paying down short-term borrowing:
    - State deposits declined to less than €1 billion at end–May 2015; program targets were €5 billion in 2015 and €8 billion over the medium term.
    - Replenishment of Greece’s SDR holdings assumed at €0.7 billion.
    - Of the €10.7 billion short-term borrowing from general government entities, about €6 billion ought to be consolidated into the Treasury Single Account; the rest must be repaid.
    - These actions would add €6½ billion to financing needs during 2015–18 relative to the last review.
    - Assumes the HFSF bank recapitalization buffer remains set aside pending comprehensive bank assessments.
  - Interest rates and market borrowing assumptions:
    - Market borrowing assumed at an average maturity of 5 years and average nominal interest rate of 6¼ percent for the next several decades.
    - Calibration note: pre-crisis market cost of Greek debt was about 5 percent; a modest spread is added to reach the assumed market rate.

### Quantified financing needs and timing
- Financing needs:
  - Total financing needs from October 2015 to end–2018: about €50 billion.
  - New European money required over the three-year period: at least €36 billion.
  - 12-month forward financing requirements from October 2015 onward: about €29 billion.
  - 3-year financing need from October 2015 to December 2018: about €52 billion.
- Interim coverage assumptions:
  - It is assumed it could take until September for prior actions and financing assurances to be in place; financing needs until then could be met from already committed European funds, including temporary use of about €6 billion of the HFSF buffer.
  - The amount and tranching of IMF disbursements will be decided by the IMF Executive Board.
  - Assumed practice: European partners will cover at least 2/3 of the financing needs.

### Table summary (selected figures from Table 1)
- A. Gross financing needs (Oct 15 - Dec 18): 50.2
  - Amortisation: 29.8
  - Interest payments: 17.2
  - Arrears: 7.0
  - Cash buffer for deposit build-up: 7.7
  - Privatisation (-): 2.0
  - Primary surplus (-): 9.4
- B. Potential financing sources from Europe (Oct 15 - Dec 18): -1.7
  - SMP/ANFA profits: 4.2
  - Replenishing HFSF buffer: -5.9
- C. Net financing needs (A-B) (Oct 15 - Dec 18): 51.9
- 12-month financing (Oct 15 - Sep 16): 23.4
  - Amortisation: 9.6
  - Interest payments: 4.9
  - Arrears: 7.0
  - Cash buffer for deposit build-up: 4.0
  - Privatisation (-): 0.5
  - Primary surplus (-): 1.7
- Potential financing sources from Europe (12-month): -5.9
  - SMP/ANFA profits: 4.2
  - Replenishing HFSF buffer: -5.9
- C. Net financing needs (12-month): 1 / 29.3
  - Note: "1 The amount of IMF disbursements will be decided by the IMF Executive Board. There are €16 billion available in total under the current arrangement."

### Policy implications and recommendations
- For debt to be sustainable with high probability, measures needed include:
  - Re-establishing policy implementation consistent with program targets (including primary surplus objectives and structural reforms).
  - Extending maturities of existing European loans significantly.
  - Securing new European financing on concessional terms comparable to existing support.
- If reforms and fiscal targets weaken further, debt haircuts would be necessary.
- Privatization strategy:
  - Assume modest privatization receipts of about €500 million per year for fiscal planning.
  - Continue privatization to improve governance and investment climate rather than primarily for fiscal revenue.
  - Any privatization receipts above DSA assumptions should be used to pay down debt.
- Banking sector:
  - Preserve and, if necessary, reconstitute the HFSF bank recapitalization buffer pending comprehensive bank balance sheet assessment.
  - Address high nonperforming loans to avoid forcing capitalization that would undermine privatization prospects.

### Financing gap and need for concessional official financing
- It is imperative for debt sustainability that the euro area member states provide additional resources of at least €36 billion on highly concessional terms (AAA interest rates, long maturities, and grace period) to fully cover the financing needs through end–2018, in the context of a third EU program.
- The central issue: public debt cannot migrate back onto the balance sheet of the private sector at rates consistent with debt sustainability, until debt-to-GDP is much lower with correspondingly lower risk premia.

### Debt projections, persistence, and vulnerability
- Assuming official (concessional) financing through end–2018:
  - Debt-to-GDP ratio is projected at about 150 percent in 2020.
  - Debt-to-GDP is projected to be close to 140 percent in 2022.
- Even with concessional financing through 2018, debt would remain very high for decades and highly vulnerable to shocks.
- Using the thresholds agreed in November 2012, a haircut that yields a reduction in debt of over 30 percent of GDP would be required to meet the November 2012 debt targets.
- With debt remaining very high, any further deterioration in growth rates or in the medium-term primary surplus relative to the revised baseline would result in significant increases in debt and gross financing needs.

### Shift from stock metrics to Gross Financing Needs (GFN)
- Given the extraordinarily concessional terms that now apply to the bulk of Greece’s debt, the debt/GDP ratio is not a very meaningful proxy for the forward-looking debt burden.
- It is preferable to focus on the future path of gross financing needs (GFN).
- The MAC DSA benchmarks of 15–20 percent of GDP for GFN are used to define a sustainable path; given Greece’s weak policy framework and easy loss of market access, the lower threshold (15 percent) is the relevant one.
- If the program had been implemented as specified at the last review, debt servicing would have been within the recommended threshold of 15 percent of GDP on average during 2016–45. This would require:
  - Primary surpluses of 4+ percent of GDP per year.
  - Decisive and full implementation of structural reforms delivering steady state growth of 2 percent per year and privatization.

### New policy package assumptions and implications
- Under the new policy package assumptions:
  - Primary surpluses of 3.5 percent of GDP.
  - Real GDP growth of 1½ percent in steady state.
  - Privatization proceeds of about €½ billion annually.
- Under these assumptions:
  - Debt servicing would rise and debt/GDP would plateau at very high levels.
  - For still lower primary surpluses or growth, debt servicing and debt/GDP rise unsustainably.
  - The dynamics are unsustainable because costly market financing replaces highly subsidized official sector financing, and primary surpluses are insufficient to offset the difference.

### Concessions and scenario to restore sustainability
- Further concessions are necessary to restore debt sustainability.
- Illustration of one option:
  - Extend the grace period to 20 years and the amortization period to 40 years on existing EU loans.
  - Provide new official sector loans to cover financing needs falling due on similar terms at least through 2018.
- Under the scenario that doubles the grace and maturity periods of EU loans (except those for bank recap funds):
  - The November 2012 debt/GDP targets would not be achievable.
  - Gross financing needs would average 10 percent of GDP during 2015-2045.
- Note on bank recapitalization loans:
  - Doubling of EFSF maturities excludes bank recapitalization loans that already have 30-year grace period; in those cases, maturities are extended to 39 years of grace and 1 year bullet repayment.
- The debt/GDP and GFN/GDP ratios continue to decline even after 40 years because a primary surplus of 3.5 percent of GDP is assumed to be maintained forever.

### Robustness tests and requirements under exceptional access policy
- Under the Fund’s exceptional access criteria, debt sustainability needs to be assessed with high probability.
- Technical note:
  - The debt-stabilizing primary balance can be defined as (r – g) times the debt/GDP ratio, where r and g are the nominal interest rate and nominal GDP growth rates, respectively.
  - For plausible (r – g) of about 2½ percent and for debt/GDP ratio of 100 percent, a primary surplus of 2½ percent of GDP would be required simply to stabilize debt.
  - For higher debt/GDP ratios, primary surpluses need to be higher to stabilize debt and even higher to bring debt down to safer levels.

### Lower growth scenarios and policy requirements (pages 12–17)
- Lower growth scenario (real GDP growth about 1 percent per year):
  - Real GDP growth of about 1 percent would still require strong labor market dynamics and structural reforms that yield TFP growth at the average of euro area countries.
  - Under this growth profile, Greece’s debt would remain above 100 percent of GDP for the next three decades.
  - Policy measures needed to preserve GFN within safe ranges:
    - Doubling the maturity and grace on existing EU loans.
    - Offering similar concessional terms on new borrowing.
  - Resulting projection: The average GFN during 2015-2045 would be 11¼ percent of GDP.
- Lower growth with medium-term primary surplus capped at 3½ percent of GDP:
  - With concessional financing and maturity extensions, concessional financing for a prolonged period (10 years) would keep the GFN stable and below the 15-percent threshold over the next three decades; debt-to-GDP decline would be very gradual.
- Lower growth with medium-term primary surplus capped at 3 percent of GDP:
  - Provision of concessional financing for a prolonged period (10 years) would keep GFN stable and below the 15-percent threshold; debt-to-GDP declines only gradually.
- Lower growth with medium-term primary surplus at 2½ percent of GDP:
  - Debt dynamics would be unsustainable even with 10-year concessional financing and doubled grace and maturities on existing debt.
  - Gross financing needs and debt-to-GDP would surge because the fiscal relaxation of 1 percent of GDP per year would need to be financed by new borrowing at market terms.
  - Measures required under the 2½ percent primary surplus / 1 percent growth scenario:
    - Concessional financing with fixed interest rates locked at current levels through 2020 to cover gaps.
    - Doubling of grace and maturities on existing debt.
    - A significant haircut of debt—example: full write-off of the stock outstanding in the GLF facility (€53.1 billion) or any other similar operation.
    - Effects: debt-to-GDP would decline immediately after a haircut but “flattens” afterwards because of low economic growth and reduced primary surpluses.
  - Combined stock (haircut) and flow (concessional financing, doubled maturities, fixed-rate financing) treatments are able to bring the GFN-to-GDP trajectory back to safe ranges for the next three decades.
- Role of fixed-rate concessional loans and swaps:
  - Concessional loans with fixed interest rates locked at current low levels provide critical improvement to GFN, especially in the outer years of the projection period.
  - Even small interest rate shocks can tilt the GFN-to-GDP ratio upwards in a low growth, low primary surplus scenario.
  - Implementation options noted:
    - Issuance of long-term bonds with fixed coupons by the ESM for a limited period.
    - Fixed-for-floating swap contracts offered by European creditors to Greece, potentially in the context of a new financial program.

*Source: _cr15165*

### conclusion holds whether one examines the stock of debt under the November 2012 framework or

### _cr15165 - conclusion holds whether one examines the stock of debt under the November 2012 framework or

### Conclusion and key requirement for sustainability
- Debt sustainability with high probability requires Greek policies to "come back on track" and, at a minimum:
  - significant extensions of maturities of existing European loans; and
  - new European financing to meet financing needs over the coming years on similar concessional terms.
- If the package of reforms is weakened further—particularly via a further lowering of primary surplus targets and even weaker structural reforms—haircuts on debt will become necessary.

### A. Background: prior assessment and factors affecting debt dynamics
- At the time of the last review in May 2014 (the IMF’s Fifth Review under the extended arrangement):
  - Debt/GDP was projected to fall from 175 percent of GDP at end–2013 to about 128 percent of GDP in 2020 and further to 117 percent of GDP in 2022.
  - These projections were above the November 2012 thresholds of debt coming down to 124 percent of GDP in 2020 and to “substantially below” 110 percent of GDP in 2022.
  - Assumptions: medium-term primary surpluses of 4+ percent of GDP and steadfast and timely implementation of structural and financial sector reforms.
  - Debt sustainability risks were very significant; debt could not be considered sustainable with high probability.
- If the program had been implemented as assumed, no further debt relief would have been needed under the November 2012 framework.
- Revisions and other factors since the last review:
  - Lower interest rates: projected 3-month Euribor declined on average 122 basis points for 2015–22; projected EFSF interest rate declined on average 161 basis points. The medium-term implied interest rate (accrual basis) fell from 3.3 percent to 2.3 percent.
    - Result: projected interest charges during 2014-2022 dropped by nearly 30 percent on an accrual basis.
    - Lower interest rates contributed to a reduction in Greece’s projected debt of €23.5 billion (9.1 percent of GDP) by end–2022 relative to the projections at the last review.
  - Return of the HFSF bank recapitalization buffer to the EFSF at end–February 2015:
    - HFSF buffer: €10.9 billion returned to the EFSF.
    - Interest savings (accrual basis) up to €1.1 billion over 7 years.
    - Projected debt stock in 2022 improved by as much as 4.9 percent of GDP.
  - Use of short-term borrowing from intra-government entities since mid-2014:
    - About €11 billion tapped from local governments, social security funds, and other entities.
    - Rolling over indefinitely about 2/3 of this short-term borrowing (by consolidating into the Treasury Single Account and repaying the rest) would lead to a fall in the 2022 debt-to-GDP ratio by approximately 5 percentage points of GDP.
  - Combined implication: factoring background changes, Greece’s medium-term debt profile would have improved by up to 13 percent of GDP relative to the last review projections.
    - Previously projected debt-to-GDP ratios of 127.7 percent in 2020 and 117.2 percent in 2022 would have declined to 116.5 percent in 2020 and 104.4 percent in 2022 under those favorable assumptions.

### B. Baseline scenario — changes since early 2015 and drivers of higher financing needs
- Aggregate projection: financing needs projected to reach about €50 billion from October 2015 to end 2018, requiring new European money of at least €36 billion over the three-year period.
- Main contributors to increased financing needs (relative to the last review):
  - Lower fiscal targets:
    - 2014 primary fiscal balance fell short of program target by 1.5 percent of GDP.
    - Proposed reduction in primary surplus targets from 3 percent of GDP in 2015 and 4.5 percent of GDP in 2016 and beyond to 1 percent of GDP in 2015, 2 percent in 2016, 3 percent in 2017, and 3.5 percent in 2018 onwards would add cumulatively about 7 percentage points of GDP to financing needs during 2015–18.
    - Over the next three years, needs will be €13 billion more from this factor relative to the last review.
  - Lower privatization proceeds:
    - Projected privatization proceeds under the program were €23 billion over 2014–22.
    - Given high and rising nonperforming loans and limited political commitment to privatizations, staff assumes annual proceeds of about €500 million over the next few years.
    - This assumption adds about €9 billion to financing needs during 2015–18 relative to the last review.
    - Recommendation: any privatization receipts exceeding the DSA assumptions should be used to pay down debt.
  - Lower economic growth:
    - Staff downgraded the real long-term growth rate by 50 basis points to 1½ percent.
    - Near-term growth assumed in the 2-3 percent range over the next few years as confidence returns and the output gap gradually closes.
  - Clearing arrears:
    - Estimated stock of arrears stands at over €7 billion and will need to be cleared.
    - Clearing arrears would add about €5 billion to financing needs during 2015–18 relative to the last review.
    - Note: cross-country experience suggests unreported arrears may be significant, implying upside risk.
  - Rebuilding buffers and paying down short-term borrowing:
    - State deposits in commercial banks and at the Bank of Greece declined to less than €1 billion at end–May 2015; program targets were €5 billion in 2015 and €8 billion over the medium term.
    - Replenishment of Greece’s SDR holdings assumed at €0.7 billion.
    - Of the €10.7 billion short-term borrowing from general government entities, about €6 billion ought to be consolidated into the Treasury Single Account; the rest must be repaid.
    - These actions would add €6½ billion to financing needs during 2015–18 relative to the last review.
    - Assumes the HFSF bank recapitalization buffer remains set aside pending comprehensive bank assessments.
  - Interest rates and market borrowing assumptions:
    - Market borrowing assumed at an average maturity of 5 years and average nominal interest rate of 6¼ percent for the next several decades.
    - Calibration note: pre-crisis market cost of Greek debt was about 5 percent; a modest spread is added to reach the assumed market rate.

### Quantified financing needs and timing
- Financing needs:
  - Total financing needs from October 2015 to end–2018: about €50 billion.
  - New European money required over the three-year period: at least €36 billion.
  - 12-month forward financing requirements from October 2015 onward: about €29 billion.
  - 3-year financing need from October 2015 to December 2018: about €52 billion.
- Assumptions on interim coverage:
  - It is assumed it could take until September for prior actions and financing assurances to be in place; financing needs until then could be met from already committed European funds, including temporary use of about €6 billion of the HFSF buffer.
  - The amount and tranching of IMF disbursements will be decided by the IMF Executive Board.
  - Assumed practice: European partners will cover at least 2/3 of the financing needs.

### Table summary (selected figures from Table 1)
- A. Gross financing needs (Oct 15 - Dec 18): 50.2
  - Amortisation: 29.8
  - Interest payments: 17.2
  - Arrears: 7.0
  - Cash buffer for deposit build-up: 7.7
  - Privatisation (-): 2.0
  - Primary surplus (-): 9.4
- B. Potential financing sources from Europe (Oct 15 - Dec 18): -1.7
  - SMP/ANFA profits: 4.2
  - Replenishing HFSF buffer: -5.9
- C. Net financing needs (A-B) (Oct 15 - Dec 18): 51.9
- 12-month financing (Oct 15 - Sep 16): 23.4
  - Amortisation: 9.6
  - Interest payments: 4.9
  - Arrears: 7.0
  - Cash buffer for deposit build-up: 4.0
  - Privatisation (-): 0.5
  - Primary surplus (-): 1.7
- Potential financing sources from Europe (12-month): -5.9
  - SMP/ANFA profits: 4.2
  - Replenishing HFSF buffer: -5.9
- C. Net financing needs (12-month): 1 / 29.3
  - Note: "1 The amount of IMF disbursements will be decided by the IMF Executive Board. There are €16 billion available in total under the current arrangement."

### Policy implications and recommendations (drawn from analysis)
- For debt to be sustainable with high probability, measures needed include:
  - Re-establishing policy implementation consistent with program targets (including primary surplus objectives and structural reforms).
  - Extending maturities of existing European loans significantly.
  - Securing new European financing on concessional terms comparable to existing support.
- If reforms and fiscal targets weaken further, debt haircuts would be necessary.
- Privatization strategy:
  - Assume modest privatization receipts of about €500 million per year for fiscal planning.
  - Continue privatization to improve governance and investment climate rather than primarily for fiscal revenue.
  - Any privatization receipts above DSA assumptions should be used to pay down debt.
- Banking sector:
  - Preserve and, if necessary, reconstitute the HFSF bank recapitalization buffer pending comprehensive bank balance sheet assessment.
  - Address high nonperforming loans to avoid forcing capitalization that would undermine privatization prospects.

*Italic: IMF staff conclusion and DSA summary as presented in the source content.*

### 5.      It is unlikely that Greece will be able to close its financing gaps from the markets on

### 5.      It is unlikely that Greece will be able to close its financing gaps from the markets on

### Financing gap and need for concessional official financing
- It is imperative for debt sustainability that the euro area member states provide additional resources of at least €36 billion on highly concessional terms (AAA interest rates, long maturities, and grace period) to fully cover the financing needs through end–2018, in the context of a third EU program.
- The central issue: public debt cannot migrate back onto the balance sheet of the private sector at rates consistent with debt sustainability, until debt-to-GDP is much lower with correspondingly lower risk premia.

### Debt projections, persistence, and vulnerability
- Assuming official (concessional) financing through end–2018:
  - Debt-to-GDP ratio is projected at about 150 percent in 2020.
  - Debt-to-GDP is projected to be close to 140 percent in 2022.
- Even with concessional financing through 2018, debt would remain very high for decades and highly vulnerable to shocks.
- Using the thresholds agreed in November 2012, a haircut that yields a reduction in debt of over 30 percent of GDP would be required to meet the November 2012 debt targets.
- With debt remaining very high, any further deterioration in growth rates or in the medium-term primary surplus relative to the revised baseline would result in significant increases in debt and gross financing needs.

### Shift from stock metrics to Gross Financing Needs (GFN)
- Given the extraordinarily concessional terms that now apply to the bulk of Greece’s debt, the debt/GDP ratio is not a very meaningful proxy for the forward-looking debt burden.
- It is preferable to focus on the future path of gross financing needs (GFN).
- The MAC DSA benchmarks of 15–20 percent of GDP for GFN are used to define a sustainable path; given Greece’s weak policy framework and easy loss of market access, the lower threshold (15 percent) is the relevant one.
- If the program had been implemented as specified at the last review, debt servicing would have been within the recommended threshold of 15 percent of GDP on average during 2016–45. This would require:
  - Primary surpluses of 4+ percent of GDP per year.
  - Decisive and full implementation of structural reforms delivering steady state growth of 2 percent per year (with the best productivity growth in the euro area) and privatization.

### New policy package assumptions and implications
- Under the new policy package assumptions:
  - Primary surpluses of 3.5 percent of GDP.
  - Real GDP growth of 1½ percent in steady state.
  - Privatization proceeds of about €½ billion annually.
- Under these assumptions:
  - Debt servicing would rise and debt/GDP would plateau at very high levels.
  - For still lower primary surpluses or growth, debt servicing and debt/GDP rise unsustainably.
  - The dynamics are unsustainable because costly market financing replaces highly subsidized official sector financing, and primary surpluses are insufficient to offset the difference.

### Concessions and scenario to restore sustainability
- Further concessions are necessary to restore debt sustainability.
- Illustration of one option:
  - Extend the grace period to 20 years and the amortization period to 40 years on existing EU loans.
  - Provide new official sector loans to cover financing needs falling due on similar terms at least through 2018.
- Under the scenario that doubles the grace and maturity periods of EU loans (except those for bank recap funds):
  - The November 2012 debt/GDP targets would not be achievable.
  - Gross financing needs would average 10 percent of GDP during 2015-2045 (the level targeted at the time of the last review).
- Note on bank recapitalization loans:
  - Doubling of EFSF maturities excludes bank recapitalization loans that already have 30-year grace period; in those cases, maturities are extended to 39 years of grace and 1 year bullet repayment.
- The debt/GDP and GFN/GDP ratios continue to decline even after 40 years because a primary surplus of 3.5 percent of GDP is assumed to be maintained forever.

### Robustness tests and requirements under exceptional access policy
- Under the Fund’s exceptional access criteria, debt sustainability needs to be assessed with high probability.
- Technical note:
  - The debt-stabilizing primary balance can be defined as (r – g) times the debt/GDP ratio, where r and g are the nominal interest rate and nominal GDP growth rates, respectively.
  - For plausible (r – g) of about 2½ percent and for debt/GDP ratio of 100 percent, a primary surplus of 2½ percent of GDP would be required simply to stabilize debt.
  - For higher debt/GDP ratios, primary surpluses need to be higher to stabilize debt and even higher to bring debt down to safer levels.

### Policy recommendations and judgment
- There is no rationale for invoking a systemic exception now when debt relief is needed on official sector (rather than private) claims; a debt operation on official claims will not generate adverse market spillovers and would catalyze restoring full market access.
- If grace periods and maturities on existing European loans are doubled and new financing is provided for the next few years on similar concessional terms:
  - Debt can be deemed to be sustainable with high probability.
  - This assessment rests on:
    - More plausible assumptions—given persistent underperformance—than in past reviews for primary surplus targets, growth rates, privatization proceeds, and interest rates, which reduce downside risk embedded in previous analyses.
    - Delivery of debt relief that to date have been promises but are assumed to materialize in this analysis.

*Source: _cr15165*

### 12.      The analysis is robust to somewhat lower growth and primary surplus targets.

### 12. The analysis is robust to somewhat lower growth and primary surplus targets

### Lower growth scenario (real GDP growth about 1 percent per year)
- Real GDP growth of about 1 percent would still require strong assumptions about labor market dynamics and structural reforms that yield TFP growth at the average of euro area countries.
- Under this growth profile, Greece’s debt would remain above 100 percent of GDP for the next three decades.
- Policy measures needed to preserve gross financing needs (GFN) within safe ranges:
  - Doubling the maturity and grace on existing EU loans.
  - Offering similar concessional terms on new borrowing.
- Resulting projection:
  - The average GFN during 2015-2045 would be 11¼ percent of GDP.

### Lower growth with medium-term primary surplus capped at 3½ percent of GDP
- If the medium-term primary surplus target is 3½ percent of GDP together with the concessional financing and maturity extensions above:
  - Concessional financing for a prolonged period (10 years) would keep the GFN stable and below the 15-percent threshold over the next three decades.
  - The decline in the debt-to-GDP ratio would be very gradual.

### Lower growth with medium-term primary surplus capped at 3 percent of GDP
- With primary surplus limited to 3 percent of GDP:
  - Provision of concessional financing for a prolonged period (10 years) would keep GFN stable and below the 15-percent threshold.
  - Debt-to-GDP declines only gradually (Figure 6 in source).

### Lower growth with medium-term primary surplus at 2½ percent of GDP
- If the medium-term primary surplus target were reduced to 2½ percent of GDP:
  - Debt dynamics would be unsustainable even with 10-year concessional financing and doubled grace and maturities on existing debt.
  - Gross financing needs and debt-to-GDP would surge because the fiscal relaxation of 1 percent of GDP per year would need to be financed by new borrowing at market terms.
  - Any substantial deviation from the reform and surplus package (lower primary surpluses and weaker reforms) would require substantially more financing and debt relief.

### Measures required under the 2½ percent primary surplus / 1 percent growth scenario
- To restore sustainable debt dynamics under low growth and low primary surpluses, the following would be required:
  - Concessional financing with fixed interest rates locked at current levels through 2020 to cover gaps.
  - Doubling of grace and maturities on existing debt.
  - A significant haircut of debt—example given: full write-off of the stock outstanding in the GLF facility (€53.1 billion) or any other similar operation.
- Effects of these measures:
  - The debt-to-GDP ratio would decline immediately after a haircut but “flattens” afterwards because of low economic growth and reduced primary surpluses.
  - Combined stock (haircut) and flow (concessional financing, doubled maturities, fixed-rate financing) treatments are able to bring the GFN-to-GDP trajectory back to safe ranges for the next three decades (Figure 8 in source).

### Role of fixed-rate concessional loans and swaps
- Concessional loans with fixed interest rates locked at current low levels provide critical improvement to GFN, especially in the outer years of the projection period.
- In a low growth, low primary surplus scenario, even small interest rate shocks can tilt the GFN-to-GDP ratio upwards.
- Implementation options noted:
  - Issuance of long-term bonds with fixed coupons by the ESM for a limited period.
  - Fixed-for-floating swap contracts offered by European creditors to Greece, potentially in the context of a new financial program.

*_Source: IMF staff (page 12–17 of the referenced public DSA chapter)._

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_Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/pubs/ft/scr/2015/_cr15165.pdf_