The maths show that Greece’s debt is unsustainable.
On Tuesday night an IMF report said as much. And now, in its analysis published this morning, an EU Commission report pretty much agrees, even if it warnings are not quit as stark as those coming from Washington.
The question now is, against this background, can the deal agreed only in broad outline last weekend actually be finalised ? If such fundamental flaws are being openly discussed already, is this deal now politically “do-able” ?
One particular issue is whether the IMF can now see its way to participate in the rescue programme.
A senior IMF official was quoted last night as saying it could only support a sustainable programme - and without debt relief it calculates the Greek programme will not work.
And if the IMF does not chip in, then there is a danger of the whole thing collapsing, first because its cash is needed – unless Europe is to extend yet more – and second because Germany in particular has insisted on IMF involvement, feeling it has the expertise and weight to help drive a programme through.
It was clear when the deal was announced that, in the short term, it would add to Greece’s debt burden.
Not all the money being supplied in the bailout will go to pay down existing debt – and a big chunk will be needed up front to recapitalise the banks.
The IMF has now done some back of the envelope calculations - all that can be done before any deal is finalised - and calculated that Greece’s debt to GDP ratio, already a stratospheric 177 per cent last year, will rise close to 200 per cent over the next two years.
There is no cast iron rule for what ratio is too high, but there is no question that where Greece is heading will not be sustainable, potentially raising the annual servicing costs on the debt to some 15 per cent of GDP.
Basically ,even on relatively optimistic growth scenarios, this debt level would remain stuck at high levels for years to come.
In its report, the EU Commission is a bit less pessimistic, but still sees the debt to GDP ratio rising to 165 per cent by 2020, and warns that it could reach 187 per cent on an “adverse” scenario.” Like the IMF it says that the debt repayment burden will rise to over 15 per cent of GDP in a number of years.
There are only two ways to reduce a national debt burden – very fast growth or debt restructuring. As the cuts and tax hikes will hit growth, there will be no joy in the short term on this side of the equation.
So the IMF argues for debt relief - saying dramatic measures are needed, even if it is up to Europe how to implement them. It talks of options such as 30-year grace periods on repayments. The EU Commission analysis is a little less specific, but it does say a “ very substantial reprofiling” - in other words a long extension of maturities and deferral of interest payments – would be needed to lower the annual financing burden, However this would still leave Greece with a very high debt to GDP ratio and thus make it difficult to re-enter normal borrowing markets, a point underlined by the IMF.
What this all means is that the terms for negotiations reached at the weekend have no chance of working, unless there is a significant debt restructuring. The leaders knew this, so the question is whether Germany will concede on this, provided Greece does all it promises. The mood music at the weekend would not lead to optimistic on this.
France this morning supported the IMF call. Germany has ruled out debt write-offs, but not some restructuring.
This analysis will make the deal harder to finalise, both because of its impact on Greece and across Europe.
Remember that all that was agreed was last weekend was to enter talks on a deal. The question now is whether, already, the whole thing is starting to unravel.