|The bottom line is that the second program will not work to solve Greece's problems, and that official debt relief will be needed at some point relatively soon.|
|The anticipated 237.5bn for 2010-2014 was based on an ambitious fiscal adjustment (which would generate a primary surplus of 4.5% of GDP in 2014), a settlement of 12bn of arrears, bank recapitalization costs of 50bn, a return to nominal growth (of 2.5%oya in 2014), asset sales (of 12bn during 2012-2014), the private sector debt restructuring (which would reduce both amortizations and interest expense), and a reduction in the borrowing costs of the Greek Loan Facility.|
|Source: JP Morgan|
|The medium term objective of the second program was to get Greeces debt to GDP ratio down to 120% by 2020. The table shows how this was expected to happen: from 2015 to 2020, Greece was expected to run a primary surplus averaging 4.4% of GDP, to enjoy nominal growth of 4.1% and to sell assets worth 34bn. Even with these ambitious assumptions, Greece would still have had an official financing need between 2015 and 2020 of 30.8bn, on the assumption that it would be unable to re-access capital markets. So, even with the best will in the world, a third package would always have had to follow the second package, and Greek debt would have remained at an extremely high level for the indefinite future.|
For Mackie, policymakers may be finally coming to realize that a second program will not be able to do the trick. Through a more modest calculation, the second table shows how:
|...the next IMF review is likely to present Greeces financing needs. To generate this table, we have delayed the fiscal objectives, in terms of the primary position, by two years, and put in a more subdued profile for asset sales. In addition, we have incorporated the new nominal GDP profile from the IMFs World Economic Outlook. These changes increase the official financing need for the second program by 16.5bn. This does not necessarily mean more official loans: increased T-bill issuance financed by the central bank is another option. But, somewhat more dramatically, they lift the level of debt in 2020 to 145.8% of GDP, rather than the 120% anticipated in the spring. Moreover, the official financing need between 2015 and 2020 would rise to 48.8bn. The situation could even be worse if arrears turn out to be even greater than assumed in the spring.|
|Source: JP Morgan|
But, for Mackie, even this revised financing table is not going to happen:
|Between 2009 and this year, Greece has improved its primary position by around 8.7%pts of GDP. Even with a longer adjustment period, Greece is still expected to move its primary position by a further 6.2%pts of GDP by 2016. Given that the austerity seen thus far has been associated with a decline in real GDP of around 15%, the additional austerity implied by the second program is unlikely to be tolerable... |
Although it is obvious to everyone that Greece will only be able to remain in the Euro area with substantial official debt restructuring, policymakers are still unwilling to acknowledge that explicitly in a way that changes Greeces fiscal path. The importance of official debt restructuring is not simply that it reduces debt servicing, but in addition it limits the magnitude of the required primary surplus.
What world do eurozone policymakers inhabit?