Notebook: Secret IMF staff report shocks Greece deal

July 14, 2015

“Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far,” the staff of the International Monetary Fund said in a report released Tuesday, hours after Monday’s controversial agreement between Greece and 18 partners on a third bailout for the indebted country.

The Debt Sustainability Analysis noted it was published without the input or approval of the organization’s executive board. Christine Lagarde, managing director of the IMF, participated in negotiations that led to Monday’s agreement in principle on the third bailout program for Greece. Excepts of the staff report: 

“The events of the past two weeks — the closure of banks and imposition of capital controls — are extracting a heavy toll on the banking system and the economy, leading to a further significant deterioration in debt sustainability relative to what was projected (by the IMF two weeks ago.)

(The report projected Greek debt to peak) “at close to 200 percent of GDP in the next two years. This contrasts with earlier projections that the peak in debt—at 177 percent of GDP in 2014—is already behind us.

“By 2022, debt is now projected to be at 170 percent of GDP, compared to an estimate of 142 percent of GDP projected in our published DSA.

“Gross financing needs would rise to levels well above what they were at the last review (and above the 15 percent of GDP threshold deemed safe) and continue rising in the long term.

…There are several options. If Europe prefers to again provide debt relief through maturity extension, there would have to be a very dramatic extension with grace periods of, say, 30 years on the entire stock of European debt, including new assistance. This reflects the basic premise that debt cannot be assumed to migrate back onto the balance sheet of the private sector at interest rates close to the current AAA rates before debt levels have been brought to much lower levels; borrowing at anything but AAA rates in the near term will bring about an unsustainable debt dynamic for the next several decades. Other options include explicit annual transfers to the Greek budget or deep upfront haircuts. The choice between the various options is for Greece and its European partners to decide.

–Deborah Jones

References and related reading: 

The document, An Update of IMF Staff’s Preliminary Public Debt Sustainability Analysis, is here:

Secret IMF report – Greece needs debt relief far beyond EU plans, Reuters

“Where Now For Greece?, Social Europe page on the issue

Greece bailout – live updates,  Deutsche Welle 

A Humiliating Deal for Greece, by John Cassidy, the New Yorker

F&O International Affairs columnist Jonathan Manthorpe has a firm grasp on the back story. Read his column, The Greek tragedy: a drama with many villains and no heroes. (Cllick here for the required subscription or $1 day pass to our site required). Excerpt: 

There is no shortage of villains in this Greek tragedy.  It hasn’t helped matters that the advent of the euro has been a huge boon for the EU’s industrialized economies, especially Germany. Because the euro includes dud or semi-functional economies like Greece, Portugal, Spain, Italy and Ireland, the international market place marks the currency’s value down against other hard currencies like the U.S. dollar. The result is that German exports are 50 per cent cheaper, by some analysis, than they would be if the country still used its former currency, the deutchmark.



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