Greece Debt Sustainability

Analysis
Ahsan Hayat
Faizan Abbas
Bushra Saeed
Sakina Ali
Almas jafery
Nida siddiqui

History
The European debt crisis erupted in the wake of the Great
Recession around late 2009 taking place in a handful of euro
zone member states
Four euro zone states needed to be rescued by sovereign
bailout programs, delivered jointly by the International
Monetary Fund and European Commission - with additional
support at the technical level by the European Central Bank
The three organizations representing the bailout creditors,
called "the Troika
The European Central Bank lowered interest rates and
provided cheap loans of more than one trillion euro to
maintain money flows between European banks

History
The ensuing adjustment program negotiated
with the "troika" formed by the EU, the ECB,
and the IMF imposed strict condition i.e.
A Significant fiscal adjustment
Structural reforms
Privatization efforts

History
In 1992, members of the European Union signed the Maastricht Treaty, under
which they pledged to limit their deficit spending and debt levels
In early 2000s, some EU member states turned to securitizing future
government revenues to reduce their debts and deficits
This allowed the sovereigns to mask their deficit and debt levels through a
combination of techniques, including inconsistent accounting, off-balance-sheet
transactions, and the use of complex currency and credit derivatives structures
From late 2009 on, after Greece's new elected government stopped masking its
true indebtness and budget deficit, fears of sovereign defaults in
certain European states developed in the public
In Greece, high public sector wage and pension commitments were connected to
the debt increase
Concerns intensified in early 2010 leading European nations to implement a
series of financial support measures such as the European Financial Stability
Facility (EFSF) and European Stability Mechanism (ESM)

History
In 201012, four out of eighteen euro zone states (Greece,
Ireland, Portugal and Cyprus) had difficulty/inability to repay
or refinance their government debt, without the assistance of
bailout support from the Troika
The transfer of bailout funds were performed in tranches through
multiple years
On 6 September 2012, the ECB also calmed financial markets by
announcing free unlimited support for all euro zone countries
involved in a sovereign state bailout from EFSF/ESM, through
some yield lowering Outright Monetary Transactions (OMT)
In regards of Greece and Cyprus, they both accomplished a partly
regain of market access in 2014, and are scheduled to have their
bailout program periods ended in March 2016

Total (gross) government debt around the

world as a percent ofGDPby IMF

Debt profile of euro zone countries

Introduction
Wage reductions in parallel with an increase in unemployment,
skyrocketed from 7.7% in 2008 to a peak of 27.5% by 2013
Largest ever debt restructuring experienced by a "developed"
country in 2012
It became mainly a public sector affair, with the European Financial
Stability Facility (EFSF), the IMF and the ECB now holding almost
80% of Greek debt
To expiate its debt, Greek society had to continue on an adjustment
track that was expected to generate a surplus of 3% by 2015 and of
4.5%
by
2016
and
2017

Introduction
The EU accepted its entry in the euro zone, even though it did not
comply with the macro and institutional requirements to join the
monetary union
Germany was able to run its current account surpluses on the back
of the deficits of the periphery
The euro allowed countries in the periphery to borrow, for a while,
at rates that were totally disconnected from the real credit risk
involved

Public debt,GDP, and public debt-to-GDP ratio Graph

based on data from theEuropean Commission

Details of Greece debt sustainability report

Athens will struggle to cut its debt burden to a
target of 120 percent of GDP by 2020
Following are the main points in the 9-page
confidential report, which was completed on
February 15 and submitted to euro zone finance
ministers:

Details of Greece debt sustainability report

The baseline scenario sees Greece being able to
cut its debt-to-GDP ratio to 129 percent by 2020,
but only if the country manages to follow through
on all its structural reforms, fiscal obligations and
its privatization program.
A critical concern is that a deeper recession
caused by delays with structural reforms and
privatization implementation will set the program
back as high as 160 percent of GDP in 2020

Details of Greece debt sustainability report

Greece's banks may need as much as 50 billion Euros of extra capital, 10 billion Euros
more than previously expected, with various analyses conducted by outside parties
pointing to a worse-than-forecast situation
If Greece is to get its debt level down to 120 percent of GDP by 2020, then it will
require additional private sector and official sector support
1.
A restructuring of the accrued interest owed on debts that are due to be exchanged
as part of the bond swap
2.
A reduction in the interest rate payable on loans extended to Greece under its first
program in May 2010
3.
National euro zone central banks that own Greek debt take part in the debt
restructuring in the same way as private creditors
4.
The European Central Bank transferring the profit on its holdings of Greek bonds to
national euro zone central banks and those funds then being discounted from
Greece's debt obligations

Details of Greece debt sustainability report

The debt sustainability analysis also provides the first confirmation of the
offer being made to the private sector to take part in Greece's debt
restructuring
Private sector bondholders will see a 50 percent reduction in the nominal
value of their holdings, with 35 cents in every euro converted into 30-year
bonds amortizable after 10 years and 15 cents paid upfront in short-term
notes
A coupon of 3 percent would be paid on the bonds from 2012-2020, rising to
3.75 percent from 2021 onwards
A GDP-linked additional payment would also be made, capped at 1 percent of
the outstanding amount of new bonds
The report assumes a creditor participation rate of 95 percent
The debt trajectory is extremely sensitive to program delays, suggesting that
the program could be accident prone, and calling into question sustainability

Is Greeces debt really so unsustainable?

First, sovereign states never repay their debt,
they refinance it by issuing new debt
Its debt is largely held by official creditors, i.e.
the European Financial Stability Facility (EFSF),
and other euro zone member states
The debt has a relatively long maturity, which
has been extended to 30 years, as part of the
conditionality associated with the adjustment
program

Is Greeces debt really so unsustainable?

The sustainability of the debt depends on the dynamics over time
rather than on the overall level.
A high debt-to-GDP ratio can be more sustainable than a lower one,
if the former component is expected to stabilize and fall over time,
while the latter continues to grow unabated
The interest burden on the debt is around 4% of GDP in 2015,
lower than countries like Ireland, Portugal or Italy as official
creditors have accepted a reduction of the interest rate on their
loans to levels comparable to those of the best euro zone borrowers
Greece is expected to grow by close to 3 per cent this year, faster
than the euro zone average
Greece is expected to improve its primary balance to 4.1 per cent of
GDP (up 1.4 per cent from last year), better than Portugal or Italy

Is Greeces debt really so unsustainable?

Greeces debt is expected to fall by about 7 percentage points
of GDP this year and 11 points in 2016, down to 135 per cent
of GDP in 2019, with an overall 40 points reduction in 5
years, more than that required by the fiscal compact
Although Greeces per capita GDP has fallen by about 25
percent, Greeces average income is still 8 per cent higher
than at the start of monetary union
During the eight years prior to the crisis between 1999 and
2007 Greeces average income increased by 36 per cent,
three times the rate of the euro zone, which was clearly
unsustainable and helped cause the bursting of the bubble

Assistance Program

Debt write-down does not make sense and neither is it necessary.

Those who support fail to appreciate the negative

effects it would have on financial markets confidence
in eurozone countries, which has only recently been
regained.
Following the unavoidable debt write-down for Greece
in 2012, the heads of state and government of the
eurozone declared that it was a one-off event.
The write-down was due to the special situation that
existed in Greece at the time. The leaders clear
statement, and the decisive action that accompanied it,
helped to restore investor confidence.

 Calls for a write-down ignore the fact that Greece has

achieved a lot in the meantime.
According to forecasts by the Troika, which consists
of the European Central Bank, the International
Monetary Fund and the European Commission,
Greeces debts will stabilize in 2014 and decline
rapidly afterwards.
The vicious circle of old debt leading to additional
new debt will be broken. The aid that was provided,
which is intended to help the country help itself, will
enable Greece to succeed in getting its own debts
under control.

What must Greece do to return to growth

and prosperity
1. Debt sustainability is key.
The decisive factor is not the current debt level but the
sustainability of the countrys debt over time.
This issue is based on the countrys economic approach
in conjunction with the Troikas assessment of the extent
to which the economic outlook for Greece is realistic in
terms of also servicing debt that becomes due in the
future.
Debt sustainability is an essential precondition else the
country will not be able to repay its loans.

2. Implementation of reforms to foster growth.

Growth-oriented structural reforms and consolidation of public
finances leading to a decline in debt levels.
Following the economic slump of the last few years, the Troika
expects that the Greek economy will grow in real terms by around
2 per cent per year and that the country will achieve an annual
primary surplus (budget surplus before interest payments) of slightly
more than 4 per cent of GDP.
In addition, interest costs for Greece are very low. As a result,
shrinking debts are accompanied by rising economic output.
According to the Troika, debt levels in relation to GDP will decline by
around 7 percent of GDP annually and will fall to 113 per cent of
GDP by 2022.

Economic Situation has Stabilized,

Current trends confirm that the Troikas analysis

is correct.
Competitiveness has improved and the fiscal
situation is under control.
Germany is helping to promote growth and the
supply of credit to small and medium-sized
enterprises by means of additional support
worth up to 100 million.
As confidence in the growing productivity of the
Greek economy increases, Greece will also be
able to gradually return to the capital markets.

 Other European economies have already successfully

undertaken similar adjustment processes in the
past. Belgium was able to reduce its public debt from
134 per cent of GDP in 1993 to 84 per cent of GDP in
2007.
In the 1990s, Italy achieved an annual surplus of
revenue over spending of over 4 per cent of GDP and
was able to significantly reduce its debt levels.
Ireland, whose public debt currently stands at around
123 per cent of GDP, is already able to place sovereign
bonds on the capital markets, having successfully
carried out key structural reforms.

 Eurozone has already made its own tangible

contribution to boosting Greeces debt sustainability
and supporting the gradual return of the country to
the capital markets in the period after 2014.
The (already approved) extension of the maturities of
the issued assistance loans and the reduction of the
interest burden provide relief that will eventually
make it possible for private investors to purchase
Greek government bonds once again.
A new debt write-down would destroy the growing
confidence in Greece and must be rejected for this
reason.