Greece may face multi-year crisis after aid

By Brian Love, European Economics Correspondent – Analysis

PARIS (BestGrowthStock) – Greece may still face a multi-year debt crisis and is likely to require further infusions of aid after obtaining emergency loans this year, Reuters calculations suggest.

Athens on Friday asked euro zone governments and the International Monetary Fund for access to a 45 billion euro aid facility. That amount of money would cover Greece’s borrowing needs for roughly a year.

Finance Minister George Papaconstantinou said he expected to get the first tranche of aid before Greece has to refinance an 8.5 billion euro bond in mid-May.

But Greece’s recession is so deep, and the financial markets have become so reluctant to lend to it, that it may need fresh assistance in 2011 and 2012.

It is unclear whether European governments will have the political will to keep providing Greece with fresh funds for that long — and if they cut off access, a debt default, restructuring or rescheduling may become likely.

Calculations with a simple spreadsheet model show the extent of Greece’s challenge.

Under plans agreed earlier this year with the European Union, Greece aims for the ratio of its public debt to gross domestic product to peak next year and begin falling in 2012.

The plan envisions the ratio rising from 113.4 percent last year to 120.4 percent this year, but then growing only slowly to 120.6 percent next year before dropping to 117.7 percent in 2012 and 113.4 percent in 2013.

The plan is based on annual assumptions for GDP growth, the primary budget balance excluding interest payments and effective debt servicing costs. But events in the last few weeks have cast doubt on all of those assumptions.

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Although the Greek government has assumed GDP will shrink 0.3 percent this year, Greece’s central bank has forecast a much bigger drop of 2.0 percent.

On Thursday, the European Union’s statistics agency said Greece’s budget deficit was 13.6 percent last year, not 12.7 percent as previously estimated.

And jittery markets have pushed the yield on three-year Greek government bonds up to around 10.5 percent, far above debt servicing costs of below 5.0 percent assumed by the government’s plan.

That is why the emergency loans, which are expected to carry an interest rate of about 5.0 percent, are so important.

If Greece can continue to borrow at about 5.0 percent through 2013, its debt trajectory may not look too bad, even if its growth assumptions for each year are cut by 1.7 percentage points and its primary budget balance by 0.9 point.

The model suggests the debt/GDP ratio would climb to 123.0 percent this year, 126.1 percent next year and 126.3 percent in 2012, before falling to 124.9 percent in 2013.

If, however, access to fresh emergency loans is halted after just one year and Greece is forced to borrow at higher market rates — resulting in average debt servicing costs rising by one percentage point each year, for example — the outlook worsens dramatically.

The debt/GDP ratio continues rising through 2013, when it hits 131.1 percent — a classic “death spiral” in which snowballing interest costs prevent a country from controlling its debt.

To prevent such a spiral, European governments may have to commit themselves to funding most of Greece’s new borrowing for several years — a burden which they could manage economically but perhaps not politically, especially if a public backlash against austerity in Greece makes it slow its deficit-cutting.

A Reuters poll of about 50 economists this week showed they saw only a tiny chance of Greece defaulting this year, but a 23 percent chance of a default within the next five years.

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(Editing by Andrew Torchia)

Greece may face multi-year crisis after aid