The severe damage caused to the Greek economy by more than two weeks of bank closures and capital controls means the stricken eurozone country will require far more generous debt relief than is currently on offer from its single-currency partners, according to the International Monetary Fund.
A report by the Washington-based Fund leaked to the news agency Reuters shows that Greece’s public debt is likely to peak at 200% of its national income within the next two years, with the risk that the actual outcome could be even worse.
The debt sustainability analysis comes on the eve of a crucial vote in Athens when the prime minister, Alexis Tsipras, will be seeking parliamentary approval for the fresh austerity measures demanded by the eurozone in return for a three-year rescue package worth up to €86bn (£61bn).
Putting into question its involvement in the bailout, the IMF report paints a far darker picture of Greece’s public finances than contained in the blueprint released at the end of the marathon eurozone leaders’ summit on Monday.
“The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date – and what has been proposed by the ESM,” the IMF said, referring to the European Stability Mechanism bailout fund which will be used to bankroll the Greek bailout plan.
Throughout the Greek crisis, the IMF has consistently urged deeper debt relief but has met resistance from European finance ministers, who have been unwilling to make their taxpayers pay the cost of a write-down.
Tsipras has also insisted that debt relief must form an important part of the package, but the Eurogroup statement on Monday said only that further measures might be taken provided Greece adhered in full to the reforms demanded by its creditors.
In the leaked report, the IMF says that Greece’s debts threaten to be unsustainable for decades, and that its financing needs will rise so that they are above the 15% of national income level deemed safe.
The IMF added that European creditors now face the choice of either annual transfers to the Greek budget or “deep upfront haircuts” (cancellation of part of the debt).
IMF sources confirmed that an updated debt sustainability analysis had been prepared by staff and would be discussed by the organisation’s executive board.
Unless the IMF can convince itself that Greece’s debts are sustainable, it would be forbidden by its own rules to put money into a new bailout. The assumption has been that the Fund would provide €16.4bn – around 25% of the total – with the rest coming from the ESM.
This article was written by Larry Elliott Economics editor, for theguardian.com on Tuesday 14th July 2015 15.26 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010