Bailout can make Greek debt sustainable, but risks remain: EU/IMF

Tue Mar 13, 2012 6:19am EDT
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By Jan Strupczewski

BRUSSELS (Reuters) - Greece's second bailout package can make its debt sustainable, but Athens will have to stick firmly to agreed policies until 2030 and may need more money after 2014, an updated debt sustainability analysis by international lenders shows.

The analysis, prepared by the European Commission, the European Central Bank and the International Monetary Fund for euro zone finance ministers and obtained exclusively by Reuters, shows that after the debt swap at the weekend, Greek debt could fall to 116.5 percent of GDP in 2020 and 88 percent in 2030.

"Results show that the program can place Greek debt on a sustainable trajectory," said the analysis, marked strictly confidential. However, it also warned that the debt trajectory was extremely sensitive and the program was "accident prone".

It said the restructuring of privately held Greek bonds would help to initially reduce debt, but that debt would spike up again to 164 percent of GDP in 2013 due to the shrinking economy and incomplete fiscal adjustment.

"Once the fiscal adjustment is complete, growth has been restored, and privatization receipts are accruing, steady reductions of the debt ratio commence. Greece would have to maintain good policies through 2030 to reduce the ratio below 100 percent of GDP," the report said.

The euro zone may also have to be prepared to lend even more money to Athens, the report said.

It said that when Greece tries to return to markets after 2014, it would first have to issue short-term debt and still pay high interest rates because its debt ratio would still be high, it would have senior debt to pay back first and it would need to establish a considerable track record with the market.

"This would initially discourage large issuances and imply continued reliance on official financing, as committed by Euro area member states on standard EFSF borrowing terms, provided Greece successfully implements its program," the report said.   Continued...

European Commission President Jose Manuel Barroso reads documents during a debate on the last EU summit at the European Parliament in Strasbourg, March 13, 2012. REUTERS/Vincent Kessler