IMF warns eurozone that Greece needs more debt relief

by on 31 July 2018

Country’s long-term debt costs will be unsustainable in 20 years’ time, Brussels told

The International Monetary Fund has warned eurozone governments that they need to give Greece more long-term debt relief to stop the country from being locked out of financial markets as Athens prepares for life outside a bailout programme.  In a swipe at EU capitals that have pushed back at Greek demands for greater debt relief, the IMF has calculated that Greece’s long-term debt costs will be unsustainable in 20 years’ time because of the high budget surplus targets demanded by European creditors as part of Athens’ post-bailout conditions.  Without more debt relief measures, Greece “could struggle to maintain market access over the long run”, the fund said in its final economic assessment of the country before it exits the bailout programme on August 20. The IMF warning comes as Greece prepares to return to the international capital markets after eight years reliant on loans from EU governments and the Washington-based fund.  Eurozone governments last month agreed a debt relief deal that means Greece pays back little on its debt pile until 2032.  But although the measures will be enough to ensure Greece can access international capital markets in the medium term, the IMF warned that, over the longer run, EU governments would have to provide more debt relief to maintain investor confidence in the country and prevent another bailout.  IMF officials, with the support of France, had pushed for automatic debt relief measures to kick in for Greece if the economy performs worse than expected. But the proposals were rejected by more hawkish governments, led by Germany, which are reluctant to award Greece more generous terms that mean their taxpayers are not paid back in full.  The fund’s calculations find that Greece’s debt costs will “begin an uninterrupted rise” after 2038, to about 20 per cent of the country’s gross domestic product every year. It is at this point that “additional relief would be needed to secure debt sustainability”, said the report.  The IMF also threw doubt on the eurozone’s promise to reassess the debt relief measures to see if more are needed in 2032. Changes in government over the next decade and a half and the fact that Athens has to keep hitting ambitious budget targets meant the promise is in danger of not being credible in the eyes of investors, said the IMF.  “[The IMF] is particularly concerned that the commitment to provide additional debt relief is contingent on Greece’s adherence to a very ambitious primary surplus path. This in turn suggests that the commitment to provide additional relief if needed may be insufficient to mitigate the long-term risks” said the report. 

The IMF’s scepticism over Greece’s prospects stems from its more pessimistic outlook on the country’s growth outlook compared with projections by EU creditors.  The fund believes that the EU’s demand that Athens hit an average primary budget surplus averaging 2.2 per cent of GDP until 2060 — including a 3.5 per cent target until 2020 — will hit the Greek economy’s long-term growth. The IMF thinks a 1.5 per cent surplus target is more realistic.  “We would prefer these targets to be lower,” said Peter Dolman, the IMF’s mission chief for Greece. “We have doubts they can achieve the target while growing at the rate expected and needed to bring down debt.” Greece has endured the worst economic depression of any economy in modern times during the past eight years, with its economy shrinking by more than a quarter.

Mehreen Khan –