Greece: Preliminary Debt Sustainability Analysis (by IMF)

STRICTLY CONFIDENTIAL

February 15, 2012

Since the fifth review, a number of developments have pointed to a need to revise the

DSA. The 2011 outturn was worse than expected, both in terms of growth and the fiscal

deficit; the macroeconomic outlook has deteriorated significantly, due to events in

Europe; the fiscal outlook has deteriorated due to the economy and due to delays in

developing fiscal-structural reforms; and the strategy of the program has been adapted,

to place greater emphasis on upfront actions to improve competitiveness (which will

change the expected profile of the recovery and have implications for the fiscal accounts).

The DSA also must be updated to include the envisaged PSI deal between the IIF-led

creditor group and the Greek authorities

The assessment shows that, in a baseline scenario, public debt will decline to around 129

percent of GDP by 2020, staying above the 120 percent of GDP level targeted by

European leaders in October. The results point to a need for additional debt relief from

the o icial or private sectors to bring the debt trajectory down, consistent with the

objective of achieving a 120 percent of GDP debt ratio by 2020. The results will need to

be updated once information on additional debt-reducing actions is available.

There are notable risks. Given the high prospective level and share of senior debt, the

prospects for Greece to be able to return to the market in the years following the end of

the new program are uncertain and require more analysis. Prolonged financial support

on appropriate terms by the o icial sector may be necessary. Moreover, there is a

fundamental tension between the program objectives of reducing debt and improving

competitiveness, in that the internal devaluation needed to restore Greece

competitiveness will inevitably lead to a higher debt to GDP ratio in the near term. In this

context, a scenario of particular concern involves internal devaluation through deeper

recession (due to continued delays with structural reforms and with fiscal policy and

privatization implementation). This would result in a much higher debt trajectory, leaving

debt as high as 160 percent of GDP in 2020. Given the risks, the Greek program may

thus remain accident-prone, with questions about sustainability hanging over it

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