Leaked memo bares Greek debt nightmare

A leaked memo published by the Financial Times laid bare the problems which Greece is facing, saying that the current bailouts could leave the country on its knees.

Peter Spiegel, from the Financial Times reported the memo, distributed among senior EU officials, saying:

Forcing austerity on Greece could cause debt levels to rise by severely weakening the economy while its €200bn debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors.

Prolonged financial support on appropriate terms by the official sector may be necessary.”

Under the tailored scenario described above, the debt ratio would peak at 178 percent of GDP in 2015. Once growth did recover, fiscal policy achieved its target, and privatization picked up, the debt would begin to slowly decline. Debt to GDP would fall to around 160 percent of GDP by 2020, well above the target of about 120 percent of GDP set by European leaders. Financing needs through 2020 would amount to perhaps €245 billion. Under the assumption that stronger growth could follow on the eventual elimination of the competitiveness gap, the debt ratio would slowly converge to that in the baseline, but likely only in the late 2020s. With debt ratios so high in the next decade, smaller shocks would produce unsustainable dynamics, leaving the program highly accident-prone.

Earlier:

Euro zone finance ministers sealed a 130-billion-euro bailout for Greece on Tuesday to avert a chaotic default in March after persuading private bondholders to take greater losses and Athens to commit to deep cuts.

After 13 hours of talks, ministers finalized measures to cut Greece's debt to 120.5 percent of gross domestic product by 2020, a fraction above the target, to secure its second rescue in less than two years and meet a bond repayment next month.

By agreeing that the European Central Bank would distribute its profits from bond buying and private bondholders would take more losses, the ministers reduced the debt to a point that should secure funding from the International Monetary Fund and help shore up the 17-country currency bloc.

But the austerity measures wrought from Greece are widely unpopular among the population and may hold difficulties for a country which is due to hold an election in April. Further protests could test politicians' commitment to cuts in wages, pensions and jobs.

Every government in the currency union will also have to approve the package. Northern creditors, such as Germany, had pressed for even tougher measures to be placed on Greece, but Finance Minister Wolfgang Schaeuble said he was very confident a majority in parliament would approve the package.

"We have reached a far-reaching agreement on Greece's new program and private sector involvement that would lead to a significant debt reduction for Greece ... to secure Greece's future in the euro area," Jean-Claude Juncker, who chairs the Eurogroup of finance ministers, told a news conference.

The euro gained in Asia after the bailout was agreed.

Some economists say there are still questions over whether Greece can pay off even a reduced debt burden.

A return to economic growth could take as much as a decade, a prospect that brought thousands of Greeks onto the streets to protest on Sunday. The cuts will deepen a recession already in its fifth year, hurting government revenues.

"We sowed the wind, now we reap the whirlwind," said Vassilis Korkidis, head of the Greek Commerce Confederation. "The new bailout is selling us time and hope at a very high price, while it doggedly continues to impose harsh austerity measures that keep us in a long and deep recession."

Source: Reuters