The International Monetary Fund (IMF) released its preliminary draft Debt Sustainability Analysis (DSA) on Monday, May 23. the DSA was prepared by the fund staff in the course of policy discussions with the authorities and the European institutions in recent months.
The report, published a day ahead of the crucial Eurogroup on May 24, calls for an “upfront” and “unconditional” debt relief. Without immediate debt relief the recession-ravaged country would deteriorate dramatically over the coming decades. In fact, at the current pace debt would eat up 60 percent of the budget by 2060.
The report states that “providing an upfront unconditional component to debt relief is critical to provide a strong and credible signal to the markets about the commitment of official creditors to ensuring debt sustainability, which in itself could contribute to lowering the market financial costs. An upfront component can also help garner more ownership for reforms.”
The report states that public debt was projected to surge from 115 percent to 150 percent of the GDP because of the expected internal devaluation. A deeper-than-expected recession necessitated significant debt relief in 2011-2012 to maintain the prospect of restoring sustainability. Serious implementation problems caused a sharp deterioration in sustainability that raised new doubts on the realism of policy assumptions from mid-2014 onwards.
Developments since the summer of 2015 suggest that DSA assumptions can no longer be deferred if the DSA is to remain credible. The report suggests that the fiscal relaxation since mid-2014 reflects the fact that the adjustment in previous years had increasingly relied on hiking already high tax rates levied on a narrow base and on ad hoc spending cuts not supported by underlying structural reforms as detailed in Box 1.
There is a gap between projected outcomes and the sustainability objectives noted with revised projections suggesting that debt would be around 174 percent of the GDP by 2020 and 167 percent by 2022. The substantial reprofiling of the terms of European loans to Greece is, according to the IMF report, required to bring GFN down by 20 percent of the GDP by 2040 and 20 percent by 2060.
Proposed debt restructuring generates savings of around 50 percent of the GDP in net present value (NPV) over the projection horizon.
The report is harshly worded, making it clear that the IMF would not be prepared to financially support the 86-billion-euro bailout unless the hard stand towards Greece is eased up.
All eyes on Eurogroup
Reuters newsagency reports that a 10-billion-euro tranche will be unlocked for Greece at Tuesday’s Eurogroup following reforms passed through in Greek Parliament. Finnish Finance Minister Alexander Stubb appeared hopeful that the review would end for Greece and lift pressure for a Grexit. Another German official, speaking on the condition of anonymity, told Reuters that the IMF’s stand is unacceptable with the unlikelihood of an agreement on Tuesday. Reuters reports that Germany is counting on IMF Chief Christine Lagarde to place pressure on the IMF to pull back demands for debt relief for Greece.