Handelsblatt Exclusive

Greece's Incalculable Sovereign Debt

  • Why it matters

    Why it matters

    The IMF believes a Greek debt haircut is needed to relieve the country from its financial problems, but foregoing repayments is unpopular in Germany, which faces general elections this fall.

  • Facts


    • In the most positive scenario, based on predictions by European institutions, Greek debt could drop as low as 49.1 percent of GDP by 2060.
    • In contrast, in a negative scenario Greece’s debt level could soar to 226 percent of GDP over the same period.
    • Insider sources report that Germany’s finance minister and the IMF are planning to reach a compromise.
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Money doesn't grow on trees, you know. Picture source: Reuters

The European Stability Mechanism (ESM), the bailout fund set up for the euro zone, has drawn up new scenarios looking at how Greece’s debt levels could evolve in future. The confidential paper, which was presented to euro-zone finance ministers at the beginning of this week, has been seen by Handelsblatt.

The document sets out three scenarios. The optimistic version A, which is based on assumptions made by European institutions, suggests that Greek debt could drop from its current level of around 180 percent of gross domestic product (GDP) to 49.1 percent in 2060. The “gross financial requirement”, i.e. the potential deficit plus all expenditure for servicing debts, would come to just 11 percent of GDP. That would be significantly less than the 15 to 20 percent that Greece’s creditors still regard as affordable.

Scenario B, which the International Monetary Fund (IMF) considers more realistic, is much bleaker. In this scenario, the document says that Greek debt could “explode” over the next 40 years, soaring to around 226 percent of GDP by 2060. This would bring the gross financial requirement to a massive 52.1 percent. A third scenario, C, has been drawn up as a compromise between the first two scenarios.

The IMF is expected to pass a formal resolution on a rescue program, although it will not pay out any funds until the dispute over Greece's debts has been resolved.

The reason for the discrepancy is the length of the period under consideration, which spans more than 40 years. Even the tiniest differences in assumptions can lead to completely different results. In scenario A, for example, it has been assumed that the Greek economy will grow by an average of 1.3 percent up to 2060 and that Athens will achieve a primary surplus i.e. excluding debt servicing of an average of 2.2 to 2.6 percent. The IMF considers this unrealistic. Scenario B is based on economic growth of only 1 percent and a primary surplus of 1.5 percent.

Despite these huge fluctuations, the calculations will be used as the basis for discussions on whether Athens needs debt relief. Based on scenario A, this would not be necessary. In scenarios B and C, however, it would be. The document lists the possible forms that debt relief could take. Five different packages of measures are proposed. In the first, the term of the loans granted by the European Financial Stability Facility (EFSF) rescue fund could be extended by five years. Interest on the loans would be capped at 2 percent; if it exceeded that level, it would be deferred until 2050.

The other packages provide for more extensive relief. In the third option, the term of the loans would be extended by 15 years, meaning that Athens would not have to repay some of its debts until 2080. Interest would be capped at 1 percent until 2050.

Insider sources have reported that German Finance Minister Wolfgang Schäuble and the IMF are hoping to reach a compromise. The IMF is expected to pass a formal resolution on a rescue program, although it will not pay out any funds until the dispute over Greece’s debts has been resolved. In the interim, the ESM could pay out a new tranche of aid to Greece.


Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin and is deputy managing editor of Handelsblatt’s Berlin office. To contact the author: hildebrand@handelsblatt.com

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