Here is an earnest, but very strange, document. Click to read.
It’s a Greek debt sustainability analysis by IMF staff. Yes, one of those analyses. A preliminary one, but in many ways the DSA to end all DSAs.
It is not just because this is the frankest effort by IMF staff so far to acknowledge the straits Greece is in regarding its debt to official creditors, and accordingly, their most radical proposal yet to euthanise large parts of that official debt.
It is also because the Greek people will in part be voting on this document in Sunday’s referendum. The reference to a “preliminary debt sustainability analysis” in English on the ballot paper is to something that incorporates elements of the above.
And yet the DSA contains projections that have now been obliterated by the Greece’s cash crunch in the wake of the banks’ closure and financial controls. It’s quite hard to work out how an economy recovers from having relied on a Committee to Approve Banking Transactions to allow money to be moved around.
It’s also quite hard to work out how quickly official financing to tide Greece over into a third bailout can be restored now that the country is in default on the IMF, and won’t get new IMF money until this is cleared.
Both those things assume capital controls would end, and Greece would stay in the euro.
In that sense, this DSA is DOA. Hence the past conditional in our post’s title.
On the other hand, beneath the headline of €52bn in three years for official financing, the paper’s central proposal is striking. We’ve given it a go at translating from the sometimes jargony IMF prose…
1) We let private creditors to Greece effectively offload their exposure onto us for years. Surprise! They don’t want it back. This is what will require a third bailout.
It is unlikely that Greece will be able to close its financing gaps from the markets on terms consistent with debt sustainability. The central issue is that 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 (see Figure 4i). Therefore, 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.
2) We raised debt to GDP so much we broke it. We (well, you, the Europeans) have been reducing and stretching out how much Greece is actually paying on the debt accordingly. It’s a lot more relevant to focus on that as the debt burden now.
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 therefore makes sense to focus directly on the future path of gross financing needs (GFN), and use the MAC DSA benchmarks of 15–20 percent of GDP for that ratio to define a sustainable path.
3) Get ready for another surprise! When we look at it this way, the primary budget surpluses, privatisation proceeds and so on which we previously assumed were too risky. So we have an idea to run past eurozone taxpayers.
Given the fragile debt dynamics, further concessions are necessary to restore debt sustainability. As an illustration, one option for recovering sustainability would be to extend the grace period to 20 years and the amortization period to 40 years on existing EU loans and to provide new official sector loans to cover financing needs falling due on similar terms at least through 2018. The scenario below considers this doubling of the grace and maturity periods of EU loans (except those for bank recap funds, which already have very long grace periods).
4) You know how we got involved in Greece in the first place because we decided it was systemic, even though it was really dodgy whether we’d be paid back? We’re not doing that again. Funnily enough, we figure this might be because governments can eat losses better than banks. Also in case you didn’t pick it up, we’re quite keen on this doubling of European loan maturities.
Under the Fund’s exceptional access criteria, debt sustainability needs to be assessed with high probability.While the systemic exception was applied in the past, there is no rationale for continuing to invoke it when debt relief is needed now on official sector (rather than private) claims. A debt operation on official claims will not generate adverse market spillovers. On the contrary, by allowing debt to be assessed as sustainable with high probability, such action will have a catalyzing effect in restoring full market access.If grace periods and maturities on existing European loans are doubled and if new financing is provided for the next few years on similar concessional terms, debt can be deemed to be sustainable with high probability. Underpinning this assessment is the following: (i) more plausible assumptions—given persistent underperformance—than in the past reviews for the primary surplus targets, growth rates, privatization proceeds, and interest rates, all of which reduce the downside risk embedded in previous analyses. This still leads to gross financing needs under the baseline not only below 15 percent of GDP but at the same levels as at the last review; and (ii) delivery of debt relief that to date have been promises but are assumed to materialize in this analysis.
5) This is starting to sound like a plan. Given the circumstances, we’ve tried our best to factor into the plan the chances of economic growth and primary surpluses coming in lower than we think. We reckon the plan will not blow up so long as Greece keeps pumping out primary surpluses of 3 per cent or above.
Ah hang on. Can any Greek government politically justify this level of surplus to its voters? Oh dear.
However, lowering the primary surplus target even further in this lower growth environment would imply unsustainable debt dynamics. If the medium-term primary surplus target were to be reduced to 2½ percent of GDP, say because this is all that the Greek authorities could credibly commit to, then the debt-to-GDP trajectory would be unsustainable even with the 10-year concessional financing assumed in the previous scenario. Gross financing needs and debt-to-GDP would surge owing to the need to pay for the fiscal relaxation of 1 percent of GDP per year with new borrowing at market terms. Thus, any substantial deviation from the package of reforms under consideration—in the form of lower primary surpluses and weaker reforms—would require substantially more financing and debt relief (Figure 7).
6) So if it does blow up, then we might have to ask the governments who lent bilaterally to Greece in 2010 to lose more of their money. And by more of their money, we specifically mean all of their money.
In such a case, a haircut would be needed, along with extended concessional financing with fixed interest rates locked at current levels. A lower medium-term primary surplus of 2½ percent of GDP and lower real GDP growth of 1 percent per year would require not only concessional financing with fixed interest rates through 2020 to cover gaps as well as doubling of grace and maturities on existing debt but also a significant haircut of debt, for instance, full write-off of the stock outstanding in the GLF facility (€53.1 billion) or any other similar operation. The debt-to-GDP ratio would decline immediately, but “flattens” afterwards amid low economic growth and reduced primary surpluses. The stock and flow treatment, nevertheless, are able to bring the GFN-to-GDP trajectory back to safe ranges for the next three decades (Figure 8).
Maybe they’d be more amenable to the idea of one visitor to Camp Alphaville’s Greece panel on Wednesday. Turn it all into a giant GDP warrant…
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