Excerpts from the International Monetary Fund (IMF) report were presented to the Eurogroup Working Group (EWG) – junior finance ministers and treasury officials who prepare meetings of euro zone finance ministers.
“It is clear that Greece is off track and there is no chance they will cut the debt to 120 percent of GDP in 2020 as envisaged. It will be rather 136 percent, and this would be under a positive scenario of a primary budget surplus, a return to economic growth, and privatization,” a euro zone official, who insisted on anonymity, said.
“New prior actions will be needed, on top of the existing 89,” the official said, referring to a list of already agreed reforms that need to be in place before any new tranches of euro zone and IMF emergency loans to Greece can be paid.
Apart from the debt projections, representatives of the IMF, the European Commission and the European Central Bank – known as the troika – have been calculating how much more money Athens will need if it is given until 2016 rather than 2014 to reach a primary surplus of 4.5 percent, as agreed in February.
A primary surplus or deficit is the budget balance before the government services its debt. In Greece’s case, it would mean government tax revenues exceeding spending, meaning Athens is beginning to get on top of its budget-deficit problems.
The two extra years would give the fast-contracting Greek economy some welcome respite, allowing it to return to growth sooner and therefore increasing the chances the country would eventually be able to make its debt sustainable.
“Additional financing needs for Greece are now seen at around 30 billion euros ($39 billion),” the official said after the EWG meeting. Estimates from various officials since July varied from 13 billion to 30 billion and on Thursday another official estimated the financing needs at 16-20 billion euros.
The critical question is where the additional money would come from.
“The IMF is pushing for OSI (Official Sector Involvement) in Greece, Germany is strictly against. And they are not the only ones,” the euro zone official said.
The IMF has long advocated that the euro zone should restructure the loans that euro zone governments extended to Greece, in what is called OSI, to reduce the debt servicing costs for Athens.
The restructuring could take the form of a further reduction of the interest rate on existing loans to Greece and an extension of their maturities, but while that would reduce financing costs, alone it would not fill the funding gap.
Another option is to bring forward some payments from the IMF that would be granted to Greece at a later date, thereby bridging its immediate funding gap, but again that is not be fully sufficient.
Also under consideration to reduce the Greek debt pile, and its servicing cost, is a debt buy back, taking advantage of the deep discount Greek debt is currently trading at.
But more direct funding for Greece from euro zone member states looks inevitable.
Any new money would have to come from the euro zone’s permanent bailout fund, the European Stability Mechanism, and is likely to face opposition from countries such as Finland, the Netherlands and Germany.
ECB ASSISTANCE NEEDED: The euro zone official said that further assistance from the ECB, in the form of new liquidity support to Greek banks, would be needed. Greece will be further discussed at the next EWG meeting on Monday.
Apart from the funding issue, talks on granting Athens the two-year extension on its primary surplus target are hindered by the opposition of some parties in the ruling Greek coalition on labor market reforms, seen as necessary by the Troika.
Greek Finance Minister Yannis Stournaras told parliament on Wednesday that Greece had already been granted the two-year extension, but several top euro zone officials, including European Central Bank President Mario Draghi and German Finance minister Wolfgang Schaeuble, said they were not aware of that.
If an agreement with Athens is reached in time, a decision on the extra money could be taken at the next meeting of euro zone finance ministers in Brussels on November 12.
Despite disagreements over how it will be done, it has become clear in recent days that a two-year extension will be granted and therefore some way will be found to finance it.
