WASHINGTON – A new IMF report on Greece’s financial situation said the country needs unconditional debt relief from European Union creditors over the long term to rebuild its financial strength.
The International Monetary Fund’s debt sustainability analysis (DSA) released on Monday also said that the relief needs to be deep through at least 2040, noting the country’s limited prospects for achieving significant economic growth and a fiscal surplus.
And it said the creditors should fix interest rates on Greek debt at no more than 1.5 per cent over that time, and essentially guarantee that debt.
The DSA said Athens faces substantial challenges to achieving even the modest goal under a proposed debt restructuring of a primary budget surplus, which excludes debt service, of 1.5 per cent.
To best help the country achieve that, it said, "providing an upfront unconditional component to debt relief is critical to provide a strong and credible signal to markets about the commitment of official creditors to ensuring debt sustainability."
The DSA, which projects what it would take for Greece to get its finances back under control and restore the economy to long-term growth, challenges the Germany-led view that Athens must commit to broader fiscal and structural reforms if the EU creditors are to reduce the country’s debt burden.
The report was released a day before eurozone finance ministers meet in Brussels to discuss reducing Greece’s debt burden and disbursing new rescue funds to the troubled country.
The IMF has said it would participate in new lending to the country only if the Eurogroup significantly eases the burden of servicing Greece’s debt.
Given Greece’s poor record at meeting conditions in its three so-far unsuccessful bailout programs, the IMF said it "understands and supports" the EU view that relief should be contingent on implementing reforms.
"However, debt relief conditional on policy implementation should not extend beyond the program period," it said, referring to the 2018 end to the EU’s current three-year bailout program.
The original plan was for Athens to achieve a 3.5 per cent primary budget surplus.
But that assumed the country’s economy would return to firm growth, which has not happened amid the slow eurozone economy and political turmoil within Greece.
And the IMF said that level would be near-impossible to attain for a long time, even with deep reforms. "Greece has been unable to sustain primary surpluses for prolonged periods," the report noted.
The only way Greece can expect to achieve a sustainable fiscal position and look to a stronger economy, the IMF said, is debt relief that involves a combination of extending the maturity of its debt, substantial deferrals of interest and principal payments, and fixing the interest rate on its debt at 1.5 per cent at most through 2040.
"Importantly, extended payment and interest deferrals without fixing the underlying interest rate would not suffice," the IMF said, pushing the highly controversial idea that Greece’s European partners would put their own credit on the line to achieve low rates for Greece.
The DSA was deeply cautious about that outlook as well. In its "downside scenario" with weaker reforms by Athens, it saw that economic growth would get to only about one per cent a year and that the country’s financing needs would begin to rise again, even with payment deferrals.
Faced with that case, the IMF said, EU creditors would need to cut the interest costs on the debt to zero until about 2050.— AFP