Wednesday, July 15, 2015

The International Monetary Fund has warned that Greece will need far bigger debt relief than euro zone countries have been prepared to consider. An IMF report leaked to Reuters shows that Greece’s public debt is likely to peak at 200% of its national income within the next two years. The updated debt sustainability analysis (DSA) was sent to euro zone governments late on Monday, hours after Athens and its partners agreed in principle to open negotiations on a third bailout programme, in return for tougher austerity measures and structural reforms.

"The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date—and what has been proposed by Eurozone authorities," the IMF said.

European countries would have to give Greece a 30-year grace period on servicing all its European debt, including new loans, and a very dramatic maturity extension, the report said. Borrowing at anything but the cheapest rates in the near term “will bring about an unsustainable debt dynamic for the next several decades,” the IMF warned, adding: “Other options include explicit annual fiscal transfers to the Greek budget or deep upfront haircuts…The choice between the various options is for Greece and its European partners to decide.”