Brussels, 26/08/2015 (Agence Europe) - It has been in the air since April 2014 and over time, has come true: the Europeans will move away from targets expressed in terms of debt/GDP ratio when they analyse the viability of the Greek debt, looking at financing requirements instead. It remains to be seen what the IMF will make of its argument that a massive debt will scare off investors.
On 12 November 2012, the managing director of the IMF, Christine Lagarde, and the then president of the Eurogroup, Jean-Claude Juncker, publicly contradicted each other at a press conference regarding the objectives to be laid down for Greece in terms of its debt (see EUROPE 10729). Although the second Greek bailout plan provided for the Greek debt to be brought down to 120% of GDP in 2020, Juncker explained on that day that this target would be put back to 2022. Lagarde then took the floor again to stress that the IMF was sticking to the initial objective. This was not enough to impress Juncker, who repeated that the targets for the reduction of the Greek public debt would be reviewed.
Between October and November 2012, several meetings of the Eurogroup were necessary to conclude the debate on the gesture the eurozone should make to help the Greek authorities out, in terms of reducing the debt. On 27 November, a debt/GDP ratio of 124% in 2020 and substantially below 110% in 2022 was set.
Three years later, the question of the viability of the Greek debt is of greater relevance than ever, with the third bailout plan, featuring financial support of €86 billion, having just begun.
In the autumn, Athens and its institutional creditors will reopen the dossier once the first quarterly monitoring mission of the third bailout plan has concluded. This mission is expected to take place in two stages: the emphasis will be laid on the financial sector in October and then, subsequently, on the structural reforms.
In the course of these debates, the eurozone is theoretically expected to move away from targets laid down in the past. This has long been the opinion of the Greek debt management agency itself.
The explanation is simple: the Greek debt features characteristics which are unique in the eurozone: average maturity of loans, reduced costs for the servicing of the debt, large concentration of the debt in the hands of the public sector, etc. The so-called 'metric' data, such as the debt/GDP ratio, do not do justice to these characteristics.
For several months, Klaus Regling, the director-general of the bailout funds of the eurozone (EFSF and ESM) has been singing from the same hymn sheet. The Greek debt is “viable due to the favourable interest rates and maturities of the EFSF and it is very easy for Greece to honour the servicing of its debt”, he said in June, firmly believing that simply taking account of the debt/GDP ratio was not enough to have a full picture of the reality. “We have to look at the annual flows and they are somewhat low”, he explained, adding that this situation also depended on the continued reform process (see EUROPE 11338).
The most recent analysis of the trajectory the Greek debt (DSA, or debt sustainability analysis) published by the European institutions last week put forward three scenarios. The base scenario assumes a recession of 2.3% of GDP in 2015 and 1.3% in 2016, followed by a return to growth (2.7% of GDP in 2017 and 3.1% in 2018). The targets laid down in terms of primary budgetary surplus (not including debt servicing) stand at 0.25% in 2015, 0.5% in 2016, 1.75% in 2017 and 3.5% from 2080 onwards, whilst the income from privatisation is expected to stand at €13.9 billion by 2022, without taking account of bank privatisation. Assuming a full application of the adjustment programme, this basic scenario advances a debt/GDP ratio of 201% in 2016, 175% in 2020, 160% in 2022 and 122% in 2030.
The second scenario is based on a partial implementation of the programme, less income from privatisation (3.7 billion up to 2022), growth lower by half a point of GDP a year and lower budgetary objectives (primary budgetary deficit of 1% in 2015, 0% in 2016 and budgetary surpluses of 1.5% in 2017, 2% in 2018 and 3.5% in 2019 and beyond). According to these parameters, the debt/GDP ratio will evolve as follows: 207% in 2016, 186% in 2020, 174% in 2022 and 143% in 2030.
The final DSA scenario is more positive. It forecasts GDP growth of half a point more (compared to the base scenario), privatisation income of €24.6 billion up to 2022 (including 10 billion from bank privatisation). Under this scenario, the debt/GDP ratio would stand at 199% in 2016, 166% in 2020, 148% in 2022 and 107% in 2030.
By way of comparison, the DSA prepared for the Eurogroup on 12 July, in its most optimistic forecasts, put this ratio at 165% of GDP in 2020, 150% in 2022 and 111% in 2030. In the least optimistic scenario, the Greek debt would be 187% of GDP in 2020, 176% in 2022 and 142% in 2030.
Although the debt/GDP ratio is substantially higher in each scenario than the targets laid down in 2012, the DSA analysis proposes casting this aside and focusing instead on the gross financing requirements.
The IMF has made a reduction of the Greek debt a condition precedent for its involvement in the third bailout plan. It argues that in order for a debt to remain viable, the gross financing requirements of the country must remain below 15% of GDP. The most recent analysis of the debt trajectory state that up to 2023, Greece will have a very low debt servicing requirement. During the period 2020-2030, the gross financing requirements will remain around 12% on average, but will exceed the 15% threshold in the following decades.
The DSA therefore recommends that Greece take serious ownership of the programme. It recommends that the eurozone consider a transfer of SMP and ANFA profits (generated from the ECB holding Greek securities), which would reduce the debt/GDP ratio by five percentage points in 2030. Additionally, the maturities and interest rates on the Greek debt instruments held by the inter-institutional creditors of Athens should also be extended in order to contain the gross financing requirements. (Elodie Lamer)