Now that Greeks have decisively turned down a bailout and its accompanying austerity, we need to know what it would take to actually turn the Greek debt situation around. A recent review of Greece's debt sustainability by the International Monetary Fund shows that there have been significant negative changes in the nation's ability to sustain its current level of debt, largely because of lower government surpluses and weak fiscal reforms that have led to new financing needs.
According to the IMF's last review of Greece's fiscal picture in May 2014, things were looking up. The nation's debt-to-GDP ratio was projected to fall from 175 percent at the end of 2013 to 128 percent by 2020 and 117 percent in 2022. While this suggested that the Greek debt situation was improving, this projection by the IMF still showed that Greece was unable to meet its November 2012 framework targets of 124 percent of GDP in 2020 and 110 percent of GDP in 2022.
Unfortunately, as we all know, the situation worsened during the early part of 2015 which has necessitated an increase in Greece's financing needs? What happened?
1.) Fiscal Balance: The primary government fiscal balance fell short of the 2014 target which was set in late 2012 by 1.5 percent of GDP. Going forward, the situation looks even worse; he targets for 2015 and 2016 were 3 percent and 4.5 percent of GDP respectively and have been readjusted to 1 percent of GDP in 2015 and 2 percent of GDP in 2017. Over the next three years, this factor alone will mean that Greece needs another €13 billion in funding compared to what was expected in mid-2014.
2.) Privatization of the Banking Sector: The November 2012 framework projected that the Greek government would raise 23 billion euros between 2014 and 2022 by privatizing its interests in the Greek banking sector. Unfortunately, extremely high levels of non-performing debts and extremely low stock prices means that the banking sector is in a state of severe stress and may require additional capitalization. Over the past five years, cumulative privatization of the Greek banking sector has raised only €3 billion, far short of what was expected as shown on this graphic (in green):
The IMF has lowered its projected annual privatization proceeds to €500 million over the next few years, meaning that the Greek government will require an additional €9 billion in financial assistance over the years from 2015 to 2018.
3.) Economic Growth Rate: Lower rates of economic growth has occurred. It was assumed that Greece would go from a position of having the lowest average Total Production Factor growth in the euro area since it joined the EU in 1981 to a position as one of the nations with the highest Total Production Factors. Here is a graphic showing how poorly Greece's economy has functioned compared to its euro area peers between 1981 and 2014:
It was also expected that Greece's unemployment rate would reach the same low levels as are found in Germany, another wildly optimistic projection. Here is the latest unemployment data for the euro area showing that Greece's unemployment rate is over five times higher than Germany's:
So much for that projection!
4.) Accumulative Government Arrears: As conditions in Greece have deteriorated, the government has accumulated unprocessed pension and tax refund claims totalling over €7 billion. It is also quite likely that there are many unreported arrears because of constrained government budgets that have impacted government agencies reporting capabilities. The IMF projects that this factor will require an additional €5 billion in financial assistance over the next three years than what was expected in mid-2014.
5.) Tight liquidity conditions: Government deposits at both the Bank of Greece and in commercial banks declined to less than €1 billion at the end of May 2015, well below targeted levels of €5 billion. The target level of funds would be used to cover at least 8 months of debt financing needs and even at the targeted level of €5 billion, are still well below the 12 months of coverage that both Ireland and Portugal had when they exited from their respective rescue programs. As well, the Greek government has borrowed from general government entities to recycle any cash surpluses, borrowings that will have to be repaid. The IMF projects that these factors will add €6.5 billion to financing needs between 2015 and 2018 compared to what was expected in mid-2014.
When all factors are included, here is a table showing the financing requirements for Greece over the next 12 months and next three years:
The IMF notes that Greece will not be able to close the gaps in its financing from the world's debt markets on terms that are consistent with debt sustainability. As such, euro area member states will have to step in with at least €36 billion of concessional financing to cover the nation's financing needs from now until the end of 2018. Even with that financing, the debt-to-GDP is projected at 150 percent in 2020 and 140 percent in 2022 as shown in blue on these two graphics which compare the debt-to-GDP levels with and without concessional financing from the euro area:
The IMF also notes that the debt is expected to remain high for decades to come and that the Greek debt situation would be highly vulnerable to shocks including deteriorating economic growth rates and rising government deficits.
As we can see, without additional concessional financing from the nation's lenders, the Greek debt situation is likely unsustainable and will likely require lenders to take yet another debt haircut. At some point, this situation will reach a point of no return and lenders will have to accept that the Greek debt situation is unrepairable despite the fact that Prime Minister Alexis Tsipras believes that Greeks can work together and complete a national effort for exiting this crisis. It certainly looks like his work is cut out for him.