Greece's chronic recession and the receding hope of an economic recovery in the next two years have blown a hole of at least 30 billion euros ($36.85 billion) in its financial rescue plan, officials familiar with the situation told Dow Jones Newswires.
The officials argued that the findings indicate a need for official creditors to write down their claims by at least that amount if they want to keep Greece in the euro zone, as well as finding new money to fund the country for longer. The officials represented two of four parties to the talks: the Greek government and the "troika" of the European Union, European Central Bank and International Monetary Fund.
Together, the four had forced private bondholders to write down their claims by 53.5% earlier this year, but the official creditors hadn't taken any losses themselves. As a result, the net relief effect has fallen short of what was hoped.
"The haircut on private holders has proved not to be enough," said one official involved in the next round of talks.
He said that by the end of the decade, Greece's nominal debt could be more than EUR30 billion euros over what was projected back in March.
"We estimate that there will likely be an overshoot that could surpass EUR30 billion, so if you want to bring the debt level back to a sustainable footing you either give Greece the extra money or you take a hit on what you are owed."
That thinking is consistent with a recent IMF paper that played up the theoretical benefits of other creditors--notably the ECB--in accepting losses on the money they are owed. IMF officials have already said that they won't provide any more money to Greece in the current circumstances, and none has shown any willingness for the IMF to forgo its usual preferred status as a creditor.
But it is far from clear that the country's exasperated partners in the euro zone will accept that logic. In Germany and Finland in particular, opposition has hardened to sending any more money to Greece, while the readiness to cut it off from official support--even at the cost of it leaving the euro zone--has risen. Chancellor Angela Merkel has warned of the dangers of a Greek exit but has repeatedly said that only Greece itself can ensure that it stays in the currency union.
Greece's economy has drifted badly off course, missing almost all of the assumptions underlying the current rescue program. Months of political paralysis because of two election campaigns in quick succession have only made that worse.
That dynamic has fateful consequences for the country's debt trajectory, which now seems doomed to overshoot by a long way a target that had, in any case, stretched the definition of "sustainability."
The last analysis made by Greece's creditors forecast that, in a baseline scenario, Greece's ratio of debt to gross domestic product ratio would still be over 116% in 2020. The IMF's alternative, more pessimistic scenario put it at 145.7% by that time. As it is, the economy is undershooting even the pessimistic scenario, and will shrink by 7% rather than the IMF's pessimistic forecast of 5.2%, according to Prime Minister Antonis Samaras.
At present, the ECB and euro-zone national central banks hold some EUR52 billion in Greek government bonds while another EUR160 billion are owed to euro-zone governments in bilateral loans dating from 2010 and a second bailout package earlier this year from the European Financial Stability Facility. The IMF has also committed more than EUR27 billion.
In Athens, officials still hope that the creditors will come to some agreement--if not for the sake of Greece itself, then to lighten the pressure on other countries caught up in the debt crisis.
"There is a clear understanding that pulling the plug on Athens now may spell disaster for other countries like Spain, as the markets will be convinced that the euro zone has no way of containing the debt crisis," another official close to the talks told Dow Jones.
Greece has said it will seek a two-year extension to reach the budget-deficit targets of its second bailout program, which runs to 2014. Such an extension, if granted, would require an additional EUR16 billion to EUR20 billion in fresh commitments from the creditors, according to Greek estimates. Officials acknowledge that securing fresh cash commitments would be the most difficult part of any new agreement, because it would require national parliaments to vote through the funds. By contrast, persuading the ECB to restructure its holdings would be politically easier, despite opposition to any such step in Frankfurt.
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