Brussels, 02/03/2014 (Agence Europe) - The Bruegel think tank has examined the exits from the structural adjustment programmes that Portugal and Greece have been applying in return for international financial aid. Both countries are due to exit the bailout programmes in 2014.
The think tank's conclusions are as follows: For Portugal, it would be unwise to exit without calling for precautionary assistance from the European Stability Mechanism (ESM). Greece should be given a third new aid plan for €40 billion to cover its financing needs until 2030. The think tank is particularly concerned about the sustainability of public debt, as this is crucial if a country is to be able to borrow from the money markets.
The Bruegel report entitled “The long haul: managing exit from financial assistance”, examines the case of Ireland, which was able to exit its aid programme in December 2013 without making use of a precautionary credit line. Portugal and Greece are tempted to make use of precautionary credit, but Bruegel says many significant risks are associated with full recovery of the Irish economy, largely due to problems with global recovery and also the Irish financial sector, where there is still plenty of toxic debt: “Robustness of the exit is not guaranteed”. The exit from the Irish aid programme is based on a €20 billion emergency fund set up by the Irish government and that Bruegel says should not be used unless strictly necessary, so that the country can use it in the event of any shocks to the economy.
Although the money markets are “well-disposed” towards Portugal, the high refinancing needs mean that requesting a precautionary credit line from the ESM would be a “rational” choice, argues Bruegel, pointing out that Portugal still has long-standing structural weaknesses that will take time to correct. Unemployment and public debt are both at twice the pre-crisis level. If a less favourable scenario were to materialise, public debt could rapidly become unsustainable.
Bruegel suggests a four-point plan for Greece. Firstly, Greece should return to a balanced budget by 2018. Secondly, it should be given a third bailout from the eurozone, this time of €40 billion to cover its needs until 2030. This takes into account a new extension of loan maturity dates so that Greece doesn't fully repay loans to any of its European partners until 2030. The debt reduction trajectory forecast by the eurozone (124% of GDP by 2020 and 120% by 2022) is exposed to many risks. With a budget surplus of 4% a year by 2022, Greece would not need to borrow any new cash in 2030 and 2040. Thirdly, the eurozone should help the country with growth stimulus, large-scale, European-level investment programmes.
Finally, an emergency plan should be introduced. If Greece meets all its commitments, but nonetheless deviates from the baseline scenario debt levels, then Europe should write off all interest payments on loans to the country. Bruegel is aware that this would go against the European Financial Stability Fund (EFSF) and ESM rules, which only cover their own lending costs. Bruegel says that under this scenario, “EFSF/ESM shareholders would have to pick up the tab to make up for the difference between lending rates and borrowing costs”. (EL)