The Daily Update - Greece / IMF

According to a draft report issued by the International Monetary Fund (IMF), Greece’s government debt could soar to 275% of its gross domestic product (GDP) by 2060, at which time its financing needs will be a massive 62% of GDP, although these figures are disputed by the Greek government's own estimates. Greece believes debt at present is a mere 180% of GDP.

The IMF reports that Greece’s debt and financing needs will be ‘explosive’ in the coming decades unless they can renegotiate the bailout programme with the EU to lighten the load. Of course the EU also does not see such a dire outlook for Greece’s debt, believing that it is far ‘more benign’ with its forecasts being based on ‘significantly more optimistic assumptions’ the IMF notes. A spokesman for the European Stability Mechanism, an EU agency that’s dealing with the Greek bailout believes there is no reason to be unduly concerned. After reiterating that the EU has made clear commitments to support Greece he said ‘We see no reason for an alarmist assessment of Greece’s debt situation’.

The IMF does propose ways to ease the burden on Greece. Although its recommendations are not new, it still believes the Greece’s creditors should accept substantial restructuring of existing loans by extending grace periods and maturity dates, as well as further deferring  interest payments and locking in interest rates. In the past the IMF has also condemned Greece for its failure to tackle its huge tax evasion problem and make every effort to broaden its tax base. The IMF believes that in Greece, the benefits of tax evasion are comparatively high and the costs are relatively low. For example, according to the IMF ‘While penalties stipulated in the law are generally high in Greece, the probability is very low that these penalties will be fully applied and enforced. For instance, when an audit order has already been sent out, one can still apply for an amnesty on audits. In addition, if an audit detects undeclared liability, the local tax office manager may reduce the penalties for non-compliance (about 100 percent of the tax liability) and the interest for late payment (standard rate per month of 1 percent, not compounded) by up to 80 percent. If the taxpayer settles the final liability immediately, the taxpayer receives a 5 percent cash rebate on the total amount paid and faces little risk of prosecution’.

We at Stratton Street have written many a time the reasons why we do not, and have never invested in countries like Greece; mainly due to the fact that we do not see it as a ‘wealthy nation’;  with massive net foreign liabilities of ~150% of GDP and rated only 1 star on our Stratton Street Net Foreign Asset (NFA) scoring system, well below our cut off point of minus 50%. We see nothing at the present time, or indeed in the future which could change our views on the country.