A massive restructuring of Greek debt, that will mean a deeper cut for private-sector investors, looks a lot more likely after the so-called troika of international inspectors in its latest report on Greek economic reforms concluded that Athens’ public-sector debt load is unsustainable.
In the long-awaited report on Greece’s fiscal and economic reforms, the troika Thursday urged disbursing the next tranche of aid from Europe’s bailout fund as soon as possible, but warned that Athens must implement strict policy changes to put its embattled economy back on track.
“Compared with the outlook of a few months ago, the debt sustainability has effectively deteriorated, given delays in the recovery, in fiscal consolidation and in the privatization plan, as well as the perspective of bank recapitalisations,” the troika report said. “To steer policy choices towards a sustainable path, Greece has to face strict institutional and political obligations to follow a durable and ambitious reform.”
In the draft of a report prepared by a tripartite commission of the European Commission, European Central Bank, and the International Monetary Fund, the troika paints a dismal picture of the Greek economy and Athens’ political response to the crisis. The economy has contracted much more than previously forecast, the public-sector debt load has become unsustainable for the economy, privatization has been delayed, and the government has fallen far short of implementing promised fiscal and political reforms.
“The contraction in economic activity is substantially deeper than previously projected,” the report said.
Financial markets are closely watching Greece’s ability to handle its public- sector debt burden. The troika report concludes that its current deficit, about 8.9% of GDP in 2011, is not sustainable, an indication that a restructuring of Greek debt that is likely to hit private-sector investors is inevitable. Privatization income could reach EUR50 billion by 2014, if Greece steps up the sale of government assets.
Provided that Greece implements reforms and boosts its economy, the troika report predicts that Athens could be back in line with Maastricht Treaty debt- to-GDP requirements by 2014, when the troika predicts Greece’s public-sector deficit should narrow to 2.9% of GDP.
European finance ministers meeting Oct. 21 in Brussels have been waiting for the troika report to determine whether to disburse the next tranche of aid for Athens, about EUR8 billion, to allow Greece to continue paying its bills. The finance ministers are also expected to begin a discussion on restructuring Greece’s debt that is expected to involve greater private-sector involvement than agreed at European summits earlier this year.
(source: Dow Jones)
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