No Greek financial obligation relief required if primary surplus above 3 percent/GDP for 20 years: paper

By Gernot Heller| BERLIN

BERLIN Greece will not require any financial obligation remedy for euro zone federal governments if it keeps its main surplus above 3 percent of GDP for 20 years, a private paper prepared by the euro zone bailout fund, the European Stability System (ESM), showed.The paper, obtained by Reuters, was gotten ready for euro zone financing ministers and International Monetary Fund talks last Monday, which ended without a contract due to diverging IMF and euro zone assumptions on future Greek growth and surpluses.A group of euro zone finance ministers led by Germany’s Wolfgang Schaeuble firmly insists that the problem of whether Greece needs debt relief can only be chosen when the most current bailout expires in mid-2018. The IMF says the need for a bailout is already clear now.Under circumstance A, the paper presumes no debt relief would be needed if Athens kept the primary surplus– the budget balance before financial obligation maintenance– at or above 3.5 percent of gdp up until 2032 and above 3 percent until 2038. The European Central Bank says such long durations of high surplus are not unprecedented: Finland, for example, had a main surplus of 5.7 percent over

11 years in 1998-2008 and Denmark 5.3 percent over 26 years in 1983-2008. A 2nd choice under situation An assumes Greece secures the maximum possible debt relief under a May 2016 agreement.Greece would then have to keep its main surplus at 3.5 percent till 2022 however

might then reduce it to around 2 percent until mid-2030s and to 1.5 percent by 2048, giving an average of 2.2 percent in 2023-2060.

EXTENDING LOAN MATURITIES The paper says the maximum possible debt relief under factor to consider is an extension of typical weighted loan maturities by 17.5 years from the existing 32.5 years, with the last loans growing in 2080.

The ESM would likewise restrict Greek

loan repayments to 0.4 percent of Greek GDP till 2050 and top the rate of interest charged on the loans at 1 percent till 2050. Any interest payable in excess of that 1 percent would be delayed till 2050 and the deferred quantity capitalized at the bailout fund’s cost of funding.The ESM would also redeem in 2019 the 13 billion euros that Greece owes the IMF as those loans are a lot more expensive than

the euro zone’s. All this would keep Greece’s gross funding requires at 13 percent of GDP till 2060 and bring its debt-to-GDP ratio to 65.4 percent in 2060, from around 180 percent now.Scenario An assumes typical annual financial growth in Greece of 1.3 percent during the projection duration. The IMF thinks such financial growth and primary surplus assumptions are impractical in the case of Greece where policy-making institutions are weak and productivity is low.IMF MORE DOWNBEAT Scenario B is constructed on the IMF’s assumptions of average development of

1 percent and a go back to a main surplus of 1.5 percent from 2023 after five years at 3.5

percent. This sees Greek debt rising from 2022 and reaching 226 percent in 2060. Greek banks would then have to be recapitalized and the nation’s gross financing needs would, in the late 2020s, be above the

ceiling of 15 percent of GDP guaranteed by euro zone ministers, reaching more than 50 percent in 2060. To make Greek financial obligation sustainable under the IMF presumptions, the euro zone would have to offer Greece deeper financial obligation relief than it conditionally offered in 2016– something ministers reject.In Might 2016, the euro zone

guaranteed to extend the maturities and grace durations on Greek loans so that Greece’s gross funding requirements are below 15 percent of GDP after 2018 for the medium term, and listed below 20 percent of GDP later.It likewise stated at the time it would consider replacing more expensive IMF loans

to Greece with more affordable euro zone credit and move the earnings made from a portfolio of Greek bonds bought by euro zone national reserve banks back to Athens.But all that might happen just if Greece delivered

on its reforms by mid-2018 and only if an analysis revealed Athens required the financial obligation relief to make its debt sustainable.A third situation, C, is a compromise in between A and B, presuming typical financial development of 1.25 percent, a main surplus of 3.5 percent up until 2022, relieving more slowly thereafter to averages 1.8 percent, instead of 2.2 percent in 2023-2060. Under this circumstance, Greek debt might be made sustainable with an extension of euro zone weighted typical loan maturities by 15 years with the last loans growing in 2080, the topping of interest on loans at 1 percent up until 2050 and setting the amortization cap at 0.4 percent of Greek GDP.(Reporting By Jan Strupczewski; Modifying by Gareth Jones )


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