The Daily Update - Greece's debt-to-GDP warning

Over the last week the International Monetary Fund (IMF) has been pushing the EU to agree a debt relief programme for Greece so to ensure that the fund has enough time to start giving the country money. The IMF director for European affairs, Poul Thomsen, warned ‘Time is running out’, however, he did go on to say ‘but if there is an agreement in the Eurogroup meeting in May, then there will be enough time for us to activate the program and for it to coincide with the remainder of the ESM (European Stability Mechanism) program’ Not that EU seem to be taking much notice of the call for urgency, believing the decision on any Greek debt relief is up to two months away according to Valdis Dombrovskis, who has the impressive title of European Commission Vice-President for the Euro and Social Dialogue.

All this comes after warnings earlier this year that Greek financing needs could, as the IMF states, become explosive and ‘highly unsustainable’ in the coming decades unless the EU agrees to ease the burden on the bailout programme. According the IMF, by 2060 Greece’s debt could reach 275 percent of its gross domestic product. These figures are in sharp contrast to the EU own estimates, whose analysis shows a debt-to-GDP ratio in 2060 of just 104.9%.

According to the review, even if the Greek government were to carry out all the reforms required by the EU bailout program, debt will reach 160% of GDP by 2030, and from there going forward start to spiral out of control. As the IMF puts it ‘Greece cannot be expected to grow out of its debt problem, even with full implementation of reforms’ believing that the EU needs to offer significant debt relief to ensure Greece’s debt burden is sustainable.

The bailout programme for Greece runs out in 2018, and is worth up to Eur86Bln. Since the middle of 2015, the IMF has not lent any money to the Greeks as it feels its debt is not sustainable. However, the EU, lead by Germany, France and the Netherlands are keen to bring the IMF back into the fold, believing that the fund’s involvement gives the bailout program the credibility to appeal to both voters and markets.

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