According to The Wall Street Journal (WSJ), a new Debt Sustainability Assessment prepared by the European Institutions (i.e. EC/ECB/ESM) says that there are serious concerns about the sustainability of Greek government debt and that it will require mitigating measures - a step many Eurozone governments have been reluctant to take.
As per WSJ, the document doesn’t mention the views of the IMF, suggesting that there are once again differences between the Washington-based fund and its European partners.
According to the Debt Sustainability Assessment, even if Greece implements the full bailout program and manages to raise €13.9bn (€6.4bn by 2017, as per the new MoU) from the privatisation of state assets, its debt is expected to remain at 159.7% of GDP in 2022. The 2022 level is of major important because Eurozone FinMins had previously promised to bring Greece’s debt to below 110% of GDP (as per the 2012 Eurogroup Framework for Debt) by then, in an effort to keep the IMF involved in saving the country from default and an exit from the euro.
Moreover, if Greece only partially implements the program, its debt would be at 173.7% of GDP in 2022, while in the event the country achieves better than expected growth and privatization receipts its debt could fall to 148.2% of GDP in the same year.
That said, the Debt Sustainability Assessment doesn’t say what would happen to Greece’s debt if the government fails to implement the program-a scenario the IMF had found the most likely in a previous version of the DSA prepared before capital controls were introduced in late June.
As per the assessment document, due to the deterioration the Greek economy, which the Institutions expect to shrink by 2.3% in 2015 and by 1.3% 2016, there are now “serious concerns” about whether Greece will be able to pay back its debts.
To help ensure debt sustainability, the document suggests that Eurozone governments should once again agree to transfer to Greece the profits from their holdings of GGBs. In addition, they would have to proceed with a re-profiling of the Greek debt through an extension of maturities of bailout loans and interests. This way, governments might be able to avoid a reduction to the nominal value of the debt (haircut), the document adds.
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