Greek Aid Plan is on Track, but Risks Remain

Euro zone finance ministers signed off on a second Greek bailout. The first payment from the 130 billion-euro package is to be made this month. Greece is now eligible to receive more than 100 billion euros in the next three years from the European Financial Stability Facility (EFSF), starting with payments of 5.9 billion euros in March, 3.3 billion euros in April and 5.3 billion euros in May.

Euro finance officials will give a formal approval on March 14, a day before the International Monetary Fund board agrees on its share of the contribution.

To get approval for this aid package, Greece had to sign on to deep budget cuts and complete the sovereign debt restructuring. The debt swap cuts off more than 100 billion euros of the country’s debt and includes the use of collective action clauses to force debt investor participation. As a result of the swap, Greece’s debt should be on track to fall to 117 percent of gross domestic product by 2020.

According to recent debt sustainability analysis, the package of new financing, debt restructuring and reforms should lead Greece to a sustainable economy, provided that the country’s government continue on the agreed reforms until 2030.

The analysis, prepared by the European Commission, the European Central Bank and the International Monetary Fund, also showed that after the debt swap, Greece’s economy should stabilise and the debt could fall to 116.5 percent of GDP in 2020 and below 90 percent in 2030. However, based on this analysis, there are significant risks that debt reduction may be interrupted or even reversed. Under an alternative, less favourable scenario, the debt ratio in 2020 would still be above 145 percent of GDP. Furthermore, as the analysis indicated, given the high prospective level and share of senior debt, the prospects for Greece to be able to return to the market at the end of the programme are uncertain.

Sources: Reuters and Bloomberg

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