More on leaked Greek debt report

by Pieter Spiegel

Financial Times
February 21, 2012

The 10-page Greek debt sustainability report that we obtained Monday night is filled with very sobering conclusions that we highlighted in our news story that’s now up on the web.

But the document – prepared by analysts in the so-called “troika” of international lenders, the European Central Bank, European Commission, and International Monetary Fund – is filled with so much interesting data, that we thought we’d give it further airing here at the Brussels Blog.

The report, marked “strictly confidential” and dated February 15, starts with a page-long summary that includes arguably the most revealing paragraph in the entire document:

There are notable risks. Given the high prospective level and share of senior debt, the prospects for Greece to be able to return to the market in the years following the end of the new program are uncertain and require more analysis. Prolonged financial support on appropriate terms by the official sector may be necessary. Moreover, there is a fundamental tension between the program objectives of reducing debt and improving competitiveness, in that the internal devaluation needed to restore Greece competitiveness will inevitably lead to a higher debt to GDP ratio in the near term. In this context, a scenario of particular concern involves internal devaluation through deeper recession (due to continued delays with structural reforms and with fiscal policy and privatization implementation). This would result in a much higher debt trajectory, leaving debt as high as 160 percent of GDP in 2020. Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it.

Let’s unpack that paragraph. The “share of senior debt” in the first sentence refers to the fact that, once the bail-out is complete, a vast majority of Greek debt will be held by government entities, like the IMF and the ECB, so new private investors will be afraid of purchasing new bonds even in the distant future, out of fear that in a default government creditors will be made whole before they will.

“Prolonged financial support” is a euphemism that essentially means Greece is going to need bail-out money for the foreseeable future.

More