IMF Country Report No. 16/130

GREECE
May 2016

PRELIMINARY DEBT SUSTAINABILITY ANALYSIS—
UPDATED ESTIMATES AND FURTHER
CONSIDERATIONS
This preliminary draft DSA was prepared by Fund staff in the course of policy discussions
with the authorities and European institutions in recent months. This document was
distributed to the Executive Board of the IMF in the morning of May 23, 2016, but was
neither discussed nor approved by the IMF’s Executive Board.

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© 2016 International Monetary Fund

Greece: Preliminary Debt Sustainability Analysis—Updated
Estimates and Further Considerations, May 2016
I. BACKGROUND
1.
The changes to staff’s DSA discussed in this note are an extension of the gradual
evolution in the DSA that has taken place since the approval of the first program in May 2010.
The key features of this evolution relevant to the understanding of the updated DSA are as follows:


Debt was deemed sustainable, but not with high probability, when the first program was
adopted in May 2010. Public debt was projected to surge from 115 percent of GDP to a peak
of 150 percent of GDP, primarily because the expected internal devaluation implied declining
nominal GDP while fiscal deficits were expected to add to the debt burden, but also because of
the decision to forgo a private sector debt restructuring (PSI). The latter reflected concerns about
systemic risks to the euro-zone in the absence of a firewall, among other considerations. Only
under assumptions of ambitious long-term targets for growth and the primary surplus and, later,
for privatization did the DSA suggest that debt could become sustainable. Staff did not consider
this likely with high probability, and Board approval of the program was preceded by a change in
the Exceptional Access policy, allowing Fund support in cases of high risks of international
systemic spillovers even if debt was not deemed sustainable with high probability.



The much deeper-than-expected recession necessitated significant debt relief in 2011-12
to maintain the prospect of restoring sustainability. Private creditors accepted large haircuts
(concerns about contagion had largely subsided by then with the creation of a firewall); European
partners provided very large NPV relief by extending maturities and reducing and deferring
interest payments; and Fund maturities were lengthened by replacing the SBA with an EFF.
European partners also pledged to provide additional debt relief—if needed—to meet specific
debt-to-GDP targets (of 124 percent by 2020 and well under 110 percent by 2022). Critically for
the DSA, the Greek government at the time insisted—supported by its European partners—on
preserving the very ambitious targets for growth, the fiscal surplus, and privatization, arguing
that there was broad political support for the underlying policies. Despite the significant relief
and still very ambitious assumptions, the DSA’s baseline debt trajectory was considerably worse
than projected in 2010. In this context, and taking into account the new commitments by
European partners to provide additional debt relief, if needed, staff maintained its assessment
that debt was sustainable, but not with high probability.



Serious implementation problems caused a sharp deterioration in sustainability, raising
fresh doubts about the realism of policy assumptions, especially from mid–2014. The
authorities’ hoped-for broad political support for the program did not materialize, and
implementation problems became evident soon after approval of the EFF, causing long delays in
concluding reviews, with only 5 of 16 originally scheduled reviews eventually completed. The
problems mounted from mid-2014, with across-the-board reversals after the change of

2
government in early-2015. Staff’s revised DSA—published in June 2015—suggested that the
agreed debt targets for 2020-2022 would be missed by over 30 percent of GDP. Critically, this
deterioration reflected largely an increase in financing needs, as there were only modest
downward revisions to the DSA’s ambitious targets, because the new government insisted—like
its predecessor—that it could garner political support for the necessary underlying reforms. Staff
warned that growth and primary balance assumptions still remained very ambitious and
imparted significant downside risks to the outlook in view of the evident implementation
problems, and that key targets would have to be lowered in a program that the Fund could
support unless upfront actions suggested political support for the ambitious underlying policies.
2.
Developments since last summer suggest that a realignment of critical policy and DSA
assumptions can no longer be deferred if the DSA is to remain credible. While there certainly
has been progress in some areas under the new program that was put in place in August 2015 with
support by the ESM, and growth and primary balance outturns last year were better than expected,
the government has not been able to mobilize political support for the overall pace of reforms that
would be required to retain the June 2015 DSA’s still ambitious assumptions of a dramatic, rapid, and
sustained improvement in productivity and fiscal performance. In all key policy areas—fiscal, financial
sector stability, labor, product and service markets—the authorities’ current policy plans fall well
short of what would be required to achieve their ambitious fiscal and growth targets. Consequently,
staff believes that a realignment of assumptions with the evident political and social constraints on
the pace and scope of adjustment is needed, and it has revised the DSA assumptions for the primary
balance and growth as follows:


Primary surplus: The fiscal relaxation that has taken place since mid-2014 reflects in large part
the fact that the adjustment in previous years had increasingly relied on hiking already high tax
rates levied on a narrow base and on ad hoc spending cuts not supported by underlying
structural reforms, as detailed in Box 1. With tax compliance rates falling precipitously and
discretionary spending already severely compressed, staff believes that the additional adjustment
needed to allow Greece to run sustained primary surpluses over the long run can only be
achieved if based on measures to broaden the tax base and lowering outlays on wages and
pensions, which by now account for as much as 75 percent primary spending. Recent discussions
have confirmed that there is little evidence of political support for such measures, and the
proposed automatic mechanism triggering ex-post across-the-board spending cuts is not an
effective substitute for durable reforms. This suggests that it is unrealistic to assume that Greece
can undertake the additional adjustment of 4½ percent of GDP needed to base the DSA on a
primary surplus of 3½ percent of GDP.
Even if Greece through a heroic effort could temporarily reach a surplus close to 3½ percent of
GDP, few countries have managed to reach and sustain such high levels of primary balances for a
decade or more, and it is highly unlikely that Greece can do so considering its still weak policy
making institutions and projections suggesting that unemployment will remain at double digits
for several decades. In this regard, staff notes that the small primary surplus that emerged in

3
2013 proved short-lived, as two successive governments, spanning the full political spectrum,
soon yielded to pressures to spend it.
In view of this, staff believes that the DSA should be based on a primary surplus over the longrun of no more than 1½ percent of GDP. This target would in staff’s view be within the realm of
what is plausible, although it remains ambitious in as much as it requires the fiscal adjustment to
be underpinned by much stronger support for reforms and much stronger resolve by policy
making institutions, in Greece and at the European level, than currently evident.


Growth: Staff believes that the continued absence of political support for a strong and broad
acceleration of structural reforms suggests that it is no longer tenable to base the DSA on the
assumption that Greece can quickly move from having one of the lowest to having the highest
productivity growth rates in the eurozone. Two concerns stand out in this regard, as detailed in
Boxes 2 and 3:
(i) As to the financial sector, the bank recapitalization completed in 2015 was not
accompanied by an upfront governance overhaul to overcome longstanding problems,
including susceptibility to political interference in bank management. Moreover, staff believes
that, in the absence of more forceful actions by regulators, and in view of the exceptionally
large level of NPLs and high share of Deferred Tax Assets in bank capital, banks will be
burdened by very weak balance sheets for years to come, suggesting that they will be unable
to provide credit to the economy on a scale needed to support very ambitious growth
targets.1
(ii) As to broader structural reforms, the further postponement of reforms to the collective
dismissals and industrial action frameworks to the fall of 2016—overdue since 2014—and the
still extremely gradual pace at which Greece envisages to tackle its pervasive restrictions in
product and service markets are also not consistent with the very ambitious growth
assumptions used hitherto.
Against this background, staff has lowered its long-term growth assumption to 1¼ percent, even
as over the medium-term growth is expected to rebound more strongly as the output gap closes.
Here as well the revised assumption remains ambitious in as much as it assumes steadfastness in
implementing reforms that exceeds the experience to date, such that Greece would converge to
the average productivity growth in the euro-zone over the long-term.

1

The literature suggests that high levels of non-performing loans adversely affect the pace of economic recovery
(Klein, 2013, Nkusu, 2011). Furthermore credit constraints are especially likely to affect mostly high-leveraged, low
growth firms operating in concentrated banking systems (Dimelis et. al. 2016), features that are characteristic to
Greece.

4
3.
Other assumptions underpinning the DSA are detailed in Box 3. Privatization
assumptions remain broadly unchanged relative to the June DSA reflecting the dismal record
achieved so far. Moreover, given that financial sector reforms have left the governance and NPL
problems largely unresolved, staff expects no receipts from bank privatization (also given the
significant reduction in the state’s stake in the banks following the last recapitalization) and in fact
projects additional contingent liabilities from the banking sector to materialize in the future; an
allowance has been made for this in the DSA of around €10 billion. Finally, market interest rates are
assumed to remain elevated immediately following the program period and to respond
endogenously to debt dynamics, as the literature suggests.
4.
Staff believes that the revised program targets remain sufficiently ambitious to
warrant continued support from Greece’s European partners. At the same time, it is essential that
official financing be made contingent on credible policy commitments. The Fund’s exceptional access
policy requires strong prospects for program success, including adequate institutional and political
capacity to deliver the required adjustment. With the revised growth and primary balance targets,
staff considers that this criterion could be met.
II. METHODOLOGY AND OBJECTIVES
5.

As explained in the June 2015 DSA, staff believes that the debt targets and

framework agreed in 2012 are no longer meaningful for assessing debt sustainability.
Specifically, staff has recommended switching from a stock (debt-to-GDP) to a flow (gross financing
needs, GFN) framework, which can capture better Greece’s true debt burden, given that the bulk of
Greece’s debt is provided by European partners on
Greece: Composition of General Government Debt,
highly concessional terms. (Such debt accounts for
End-2015 (Percent of total)
IMF
5%
ECB
around two thirds of the total, or over 120 percent of
Other
7%
22%
GDP, with weighted average grace and maturity periods
of around 15 and 40 years, respectively, and with a
GLF
17%
weighted average floating interest rate of
around 1.2 percent). To properly reflect these
concessional terms under the new GFN framework, the
EFSFM/ESM
projection horizon needs to be considerably longer
49%
than under the stock-of-debt framework. Specifically, in
IMF
ECB
GLF
EFSFM/ESM
Other
the June 2015 DSA, staff had proposed a horizon until
Sources: PDMA; and IMF staff estimates.
2060, roughly matching the maturities of European
loans. Moreover, staff stressed that the level and path of the debt ratio remains an important debt
sustainability consideration, as it is a key determinant of the interest rate at which Greece would
refinance itself from the markets. European partners have supported this framework, including
because it is more in line with Europe’s strong preference for avoiding haircuts while being open to
significant reductions in NPV terms by extending maturities and reducing interest payments.

5
6.
Under the GFN framework, achieving debt sustainability requires maintaining GFN at
low levels for a prolonged period to allow debt to decline sufficiently before Greece can return
to markets on a larger scale. It is a question of judgment how low financing needs would need to
be and for how long they should be maintained to ensure that Greece can return to the markets on
sustainable terms. Ultimately, as argued by staff in the June 2015 DSA, any debt restructuring
solution would need to achieve two key objectives. First, it should maintain gross financing needs
well within the 15-20 percent of GDP thresholds defined in the MAC DSA for emerging-advanced
economies throughout the projection period (2060). The lower bound would need to be binding at
least for the foreseeable future, until Greece’s institutional framework is sufficiently strengthened to
bring it to the standard of advanced economies. Second, it should ensure that debt is on a sustained
downward path. In other words, solutions that provide only temporary flow relief but do not deliver a
declining debt path over the projection horizon would not be consistent with sustainability.
7.
Staff’s analysis suggests that satisfying these objectives would require gross financing
needs to remain not only below 15 percent of GDP, but below 10 percent until about 2040,
rising to 20 percent by 2060. This is similar to staff’s conclusion in the June 2015 DSA. The low GFN
until 2040 is essential to allow time for debt to decline sufficiently to permit borrowing at interest
rates consistent with debt sustainability, such that the debt path can stay on a declining trend
thereafter. For example, fixing financing needs at 15 percent of GDP until 2040 would entail an
insufficient reduction in the debt level, as it would imply market financing at interest rates that would
not be consistent with debt sustainability (both GFN and debt would embark on a rising trend
after 2040).

III. BASELINE PROJECTIONS AND RESTRUCTURING MODALITIES
8.
Under staff’s baseline assumptions, there is a substantial gap between projected
outcomes and the sustainability objectives noted above. The revised projections suggest that
debt will be around 174 percent of GDP by 2020, and 167 percent by 2022. The gap relative to the
objectives under the new GFN framework is also very significant. Gross financing needs cross the 15
percent-of-GDP threshold already by 2024 and the 20 percent threshold by 2029, reaching around
30 percent by 2040 and close to 60 percent of GDP by 2060. Debt is projected to decline gradually to
just under 160 percent by 2030 as the output gap closes, but trends upwards thereafter, reaching
around 250 percent of GDP by 2060, as the cost of debt, which rises over time as market financing
replaces highly subsidized official sector financing, more than offsets the debt-reducing effects of
growth and the primary balance surplus.2

2

The debt-stabilizing primary balance can be approximated by (r – g) times the debt/GDP ratio, where r and g are the
nominal interest rate and GDP growth rates, respectively. For example, for (r – g) around 2 and debt of
around 100 percent of GDP, a primary balance of 2 percent would be needed to stabilize the debt (and a higher one
to bring debt down). For higher debt-to-GDP ratios, the primary surpluses need to be higher to stabilize debt and
even higher to bring debt down to safer levels.

6
Figure 1. Baseline Scenario, 2014–2060
Greece: GG Debt—Previous versus Current DSA:
Baseline without Restructuring, 2014−2060 (Percent of GDP)
300

Greece: GFN—Previous versus Current DSA:
Baseline without Restructuring, 2014−2060 (Percent of GDP)

300

70

250

250

60

60

200

200

50

50

40

40

150

150
30

30

100

100

20

20

50

50

10

10

0

0

June 2015 DSA

Current

0

June 2015 DSA

Current

70

0

2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 2054 2058

2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 2054 2058

Source: IMF staff estimates.

Source: IMF staff estimates.

9.
A substantial reprofiling of the terms of European loans to Greece is thus required to
bring GFN down by around 20 percent of GDP by 2040 and an additional 20 percent by 2060,
so as to satisfy the objectives noted above and maintain debt on a downward path. The debt
restructuring modality that could satisfy these conditions would need to be based on a combination
of three measures. While there are trade-offs in calibrating these measures, one set of calibrations
that would yield the required adjustment is as follows:


Maturity extensions: An extension of maturities for EFSF, ESM and GLF loans of, up to 14 years
for EFSF loans, 10 years for ESM loans, and 30 years for GLF loans could reduce the GFN and debt
ratios by about 7 and 25 percent of GDP by 2060 respectively. However, this measure alone
would be insufficient to restore sustainability.



Payment deferrals: EFSF loans have already been extended before, and ESM loans have been
provided with long grace and maturity periods. Extending the deferrals on debt service further
could help reduce GFN further by 17 percent of GDP by 2040 and 24 percent by 2060, and—by
allowing Greece to benefit from low ESM interest rates for longer—could lower debt by 84
percent of GDP by 2060 (This would imply an extension of grace periods on existing debt
ranging from 6 years on ESM loans to 17 and 20 years for EFSF and GLF loans, respectively, as
well as an extension of the current deferral on interest payments on EFSF loans by a further 17
years together with interest deferrals on ESM and GLF loans by up to 24 years.)3 However, even
in this case, GFN would exceed 20 percent by 2050, and debt would be on a rising path.



Fixed interest rate: To ensure that debt can remain on a downward path, official interest rates
would need to be fixed at low levels for an extended period, not exceeding 1½ percent until
2040. In this regard, the ESM could attempt to take advantage of the still favorable interest rate

3

Interest on deferred interest accrues at a fixed rate of 1½ percent per year until 2040 after which it accrues at the
long-run official rate of 3.8 percent.

7
environment by trying to lock in rates for the entire stock of EFSF/ESM loans at the current longterm market rates, in addition to eliminating the spreads currently applied to GLF loans. If the
market for long-dated bonds cannot absorb the whole estimated stock of about €200 billion that
would have to be placed during the duration of the program, member states would need to find
another way to ensure that the cost of refinancing Greek debt in an environment where longterm rates gradually normalize is not placed on Greece. Thus, the fixing of the interest rates
would in effect require a commitment by member states to compensate the ESM for the losses
associated with fixed interest rates on Greek loans, or any similar commitment. This would clearly
be highly controversial among member states in view of the constraints—political and legal—on
such commitments within the currency union. Adding this measure to the two noted above helps
to reduce debt by 53 percent of GDP by 2040 and 151 percent by 2060, and GFN by 22 percent
by 2040 and 39 percent by 2060, which satisfies the sustainability objectives noted earlier
(Figure 2).
10.
The proposed debt restructuring generates savings of around 50 percent of GDP in net
present value (NPV) terms over the projection horizon.4 Of this, 18-24 percent of GDP (€31-42
billion) is due to the fixing of the interest rate, while the remainder is due to the deferral of payments
and maturity extensions. Importantly, extended payment and interest deferrals without fixing the
underlying interest rate would not suffice, as the stock of deferred interest would compound at
relatively high floating rates, which would further expose Greece to interest rate risk.

Figure 2. Debt Restructuring, 2014–2060
Greece: GG Debt—Restructuring Options, 2014−2060

Greece: GFN—Restructuring Options, 2014−2060

(Percent of GDP)

70

250

250

60

60

200

200

50

50

40

40

150

150
30

30

100

100

20

20

50

50

10

10

0

0

Baseline

Restructuring

0
2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 2054 2058
Source: IMF staff estimates.

4

(Percent of GDP)
300

300

Baseline

Restructuring

70

0
2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 2054 2058
Source: IMF staff estimates.

An indicative discount rate of 3-5 percent is used for the NPV calculations, which are made for the projection
horizon (2016-60).

8

IV. SENSITIVITY ANALYSIS AND CONSIDERATIONS ON THE IMPLEMENTATION OF DEBT
RELIEF
11.
Even under the proposed debt restructuring scenarios, debt dynamics remain highly
sensitive to shocks. Two shock scenarios are considered to assess the robustness of staff’s proposed
restructuring scenario:



Upside scenario: Stronger-than-expected policies, resulting in somewhat higher growth
(1½ percent) and no additional bank recapitalization needs, combined with debt restructuring as
proposed by staff, would lead to lower Gross Financing Needs (remaining near 15 percent of
GDP by 2060), and a faster reduction in debt, which generates a virtuous cycle of lower market
interest rates and lower debt levels over the long run. This scenario illustrates the importance of
advancing structural and financial sector reforms that can enhance productivity growth and
ensure that the banking sector can support the economy over the long term.



Downside scenario: If policies were weaker than expected, resulting in lower long-run growth
(stabilizing at 1 percent) and a lower primary balance (stabilizing at 1 percent of GDP), debt
sustainability would no longer be ensured even under staff’s restructuring proposal with
extensive payment deferrals and fixed interest rates. In this case, both the debt and gross
financing needs dynamics would become unstable and rising over time, as the payment deferrals
would no longer be sufficient to ensure that Greece can access markets at rates consistent with
sustainability. To ensure sustainability under this scenario according to staff’s proposed criteria,
the interest on EFSF/ESM loans and deferred interest would need to be reduced to zero from the
current low levels (in essence implying interest-free loans) until around 2050. Considering that
even staff’s assumption of a primary surplus of 1.5 percent for many decades to come is still
quite optimistic by most metrics, this scenario illustrates the magnitude of the downside risks
that remain in staff’s DSA.
Figure 3. Robustness Scenarios, 2014–2060
Greece: GFN—Restructuring Robustness, 2014−2060

Greece: GG Debt—Restructuring Robustness,
2014−2060 (Percent of GDP)

(Percent of GDP)
200

40

175

175

35

150

150

30

30

125

125

25

25

100

100

20

20

75

75

15

15

50

50

10

10

25

5

5

0

0

200

25

Downside

Restructuring

Upside

0
2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 2054 2058
Source: IMF staff estimates.

Downside

Restructuring

Upside

40
35

0
2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 2054 2058
Source: IMF staff estimates.

9
12.
The implementation of debt relief should be completed by the end of the program
period. Providing an upfront unconditional component to debt relief is critical to provide a strong
and credible signal to markets about the commitment of official creditors to ensuring debt
sustainability, which in itself could contribute to lowering market financing costs. An upfront
component can also help garner more ownership for reforms. At the same time, in view of the
uneven record of policy implementation on the part of Greece, staff understands and supports the
wish of Greece’s European partners to make further relief contingent on program implementation.5
However, debt relief conditional on policy implementation should not extend beyond the program
period, as this would be inconsistent with the key requirement of a Fund program that adjustment be
completed within the program period in order to catalyze investor confidence. In this case, where
concerns about Greece’s membership in the currency union weigh particularly heavy on confidence,
it is critical to decisively end speculations in this regard by ensuring that measures needed to achieve
sustainability are not dependent on assessment of program implementation for many years to come.
The following modalities for the delivery of debt relief could be considered:


Short Term: The next tranche of ESM financing could be provided on the new terms (lengthened
maturity, payment deferrals, and fixed interest) to provide a strong signal to markets about
European partners’ commitment to deliver on all the elements of the restructuring.



Medium Term: Fixing interest rates and deferrals of payments and maturity extensions should
be implemented during the program period contingent on satisfactory progress with program
implementation. For example, at the end of each successful year of program implementation,
debt service, maturities, and interest rates corresponding to one third of the EFSF/ESM/GLF loan
tranches could be restructured, with priority given to tranches with shorter maturities. Regarding
the fixing of interest rates on existing loans, this could be implemented by the ESM by shifting its
funding strategy from short-term to long-term financing , making use of both direct bond
issuances and derivatives (swaps and options), which a number of AAA sovereigns have
successfully done. If portions of the refinancing cannot be done fully through the markets, then
member states might need to make additional commitments (see above).



Long Term: To ensure sustainability with a high probability, provided that Greece borrowing
from the IMF exceeds the Exceptional Access threshold, an automatic mechanism linking future
debt service to non-policy related factors (such as GDP shocks) could be considered upon
successful completion of the program to address vulnerability to shocks after the program
period. This mechanism could take the form of instruments that incorporate symmetric
adjustments to debt service in the event of GDP shocks, providing both protections to the debtor
and some upside potential to creditors.

5

For example, for low income countries, the HIPC/MDRI initiatives provide for debt relief contingent on a set track
record of program implementation.

10
13.
Staff’s DSA takes into account the unique features associated with Greece’s
membership in the euro-zone. The pledge by European leaders—first provided at the July 2011
Summit—to provide additional support, if needed, until full market access has been restored,
provided the authorities adhere to their program, has been critical for staff’s assessment that debt
could be maintained on a sustainable path despite being projected to remain significantly above
commonly accepted sustainability thresholds well into the future. The unprecedented support
already provided by the ECB (through ELA) and the ESM (through NPV relief) attests to the
importance of such commitments, as reflected in periodic signs of relative deposit stability and
nascent recovery in market access during the program period. However, as experience also suggests,
such commitments are not sufficient when adherence to the program falters, as evident in what have
also been protracted periods of interruption in ESM (and IMF) disbursements and, most dramatically,
in the loss of access to the ECB last summer, with the attendant imposition of capital controls. Thus,
it is critical for the credibility of the DSA that it be based on ambitious but realistic policy
commitments from the authorities. Equally important is the need for frontloaded debt relief, to be
fully delivered during the program, and with an automatic debt relief mechanism after the program
to ensure sustainability with high probability provided that Greece borrowing from the IMF exceeds
the Exceptional Access threshold.

11
Box 1. A Sustainable Primary Balance for Greece
Staff has revised Greece’s long-run primary balance to 1½ percent of GDP from 3½ percent. This represents a more realistic
assessment of Greece’s ability to deliver on fiscal policy commitments, in light of reform fatigue after several years of
consolidation. The revised primary balance is also more in line with Greece’s own historical experience and with crosscountry evidence.
Greece continues to face a daunting fiscal consolidation challenge. After seven years of recession and a structural
adjustment of 16 percent of GDP, Greece has only managed to achieve a small primary surplus in 2015, and this due to
sizeable one-off factors. This is still far away from its ambitious medium-term primary surplus target of 3½ percent of
GDP. Reaching this target still requires measures of some 4½ percent of GDP. Low-hanging fruit have been exhausted,
and the scope for new significant measures is limited.
Why does Greece require further adjustment? Without further measures, Greece will fall back into primary deficit over
the medium run (of around 1 percent of GDP), with attendant consequences for debt. This is due to several factors:


First, revenue is expected to decline relative to GDP, as: (i) the recovery is expected to rely on investment and exports,
which are not tax rich; (ii) almost half of social contributions (e.g. self employed) are not linked to income, and
property taxes are not linked to market prices; and (iii) one-off revenues from bank liquidity support will taper off.



Second, spending pressures are likely to re-emerge, reflecting the fact that past
spending cuts have not been supported by reforms. Spending on goods and
services fell to 16 percent of primary spending (lower than its pre-crisis level
of 19 percent and the euro-area average of 22 percent). Health spending has
been severely compressed to 4½ percent of GDP, which is below euro area
average of 7 percent of GDP, despite the fact that Greece faces one of the
highest old-age dependency ratios.

30

General Government Expenditure on Goods and
Services, 2014 (Percent of primary expenditure)

25
20
15
10
5

FIN

LVA

EST

MLT

ITA

AUT

NLD

SVN

IRL

SVK

LTU

PRT

FRA

BEL

ESP

LUX

CYP

GRC

DEU

0
Source: Eurostat.

State Transfer to the Pension System, 2013
(Excl. revenue from third parties; percent of GDP)

The pension system is unaffordable and unsustainable. Greece’s current
spending on the pension system is by far the highest in the euro-area
(17½ percent of GDP), with annual transfers to the system of around 10 percent
(2½ in the euro-area). This reflects very generous pensions to existing retirees
(as noted below, the recent reform aims to address this problem over the long
run by reducing benefits of future retirees).



GRC 15'
AUT
ITA
FRA
SVK
DEU
IRL
EA
PRT
SVN
EST
FIN
NLD
CYP
LUX
ESP
MLT
LVA
LTU
0

3

6

9

12

Sources: 2012 and 2015 EC Aging Reprots; and IMF staff calculations.

The tax system offers a large implicit tax-free threshold which exempts more than half of wage and pension earners
from income tax (compared to 9 percent euro-area average). This leads to a highly skewed income tax distribution,
with the top decile contributing 60 percent of the tax revenue. Consequently, collection rates have been declining
steadily despite efforts to strengthen tax administration, and tax debt has reached 50 percent of GDP, the largest in
the euro-area.
Greece: Current Tax Collection Rate, 2010−2015

Tax-Free Income Threshold in the Euro Area, 2014

50

65

40

60

30

6,000
55

Sources: Eurostat; Greece Ministry of Finance; and IMF staff calculations.

Source: OECD.

MLT

GRC

LVA

CYP

HUN

BEL

2015

PRT

2010
2011
2012
2013
2014
Sources: Greece Ministry of Finance; and IMF staff calculations.

LUX

0

40

SVN

ESP

GRC

ITA

FIN

SVN

LTU

SVK

AUT

IRL

DEU

FRA

BEL

LVA

EST

PRT

0

10

45

DNK

0

20

50

ESP

2,000

NLD

4,000

10

FIN

20

POL

30

AUT

8,000

70

FRA

10,000

40

(Percent of GDP)

GBR

12,000

60

NOR

50

Tax Debt

(Percent)
75

IRL

Share of households below the tax-free threshold (percentile)
Tax-Free Threshold (euro, RHS)

DEU

60

SWE



12
Box 1. A Sustainable Primary Balance for Greece (concluded)
In this context, achieving a primary surplus of 3½ percent of GDP would require deep structural reforms to reduce
pension benefits and broaden tax bases. However, the authorities’ policy plans suggest that such comprehensive
reforms do not have the necessary political and social support. In this regard, the authorities’ new income tax reform
places an even higher tax burden on the top deciles, while broadening the base only by 2 percentage points, while the
new pension reform reduces spending only marginally (by 0.6-0.9 percent of GDP) by 2018, leaving main pension benefits
unchanged. Other fiscal measures in their adjustment package are largely based on further tax hikes.
Historically, Greece has been unable to sustain primary surpluses for prolonged periods. During the 1990s, Greece
was able to maintain a surplus of 1¾ for eight years. But over a longer period prior to the crisis, the primary deficit
averaged 1 percent of GDP, and widened to 2 percent of GDP after euro adoption. During the European and IMF
supported programs, the primary deficit averaged 1½ percent of GDP.
Greece: Primary Balance
(Percent of GDP)
4

(Over a 10 year period with unemployment higher than 10 percent)

6

0

4

-2

2
0
Primary Balance
Average in Pre-Crisis Period
Average since Euro Adoption
Average in Program Period
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

-10

Source: WEO.

-2
-4
-6
IRL
ESP
Avg.
SRB
MKD
BIH
POL
ALB
SVK
JAM
DZA
TTO
MAR
IRN
JOR
ZAF
Avg.
GEO
ARG
COL
SDN
TUN
ARM
CPV

-4

-8

10
8

2

-6

Average Primary Balance During Large Unemployment

European Countries
Sources: WEO; and IMF staff calculations.

Other Countries

Cross-country evidence also shows that a 3½ percent of GDP primary surplus is difficult to achieve and sustain in
the long run especially after long recessions and when faced
Table 1. Large Fiscal Consolidations: Primary Surpluses
with high structural unemployment. In a sample of 55 countries
(Percent of GDP)
in the last 200 years, there have been only 15 episodes of
Years
Average primary
Period with
Country
maintaining
recessions longer than 5 years, and no country sustained a primary
surplus
high PB 1/
high PB
surplus larger than 2 percent of GDP after such a long period of
Ireland
1998-2007
20
3.7
negative growth. Greece has experienced a recession of seven
Belgium
1990-2008
19
4.1
Denmark
1985-1992
8
3.9
years. Among the countries that have experienced double-digit
Denmark
1999-2008
10
3.9
unemployment rates since 1980, only four (out of 22) managed to
Italy
1996-2003
8
3.6
maintain a primary balance higher than 3 percent of GDP for 10
Finland
2000-2008
9
4.0
Sweden
2000-2001
2
4.2
years, and only two if commodity exporters are excluded. Looking
Canada
1997-2006
10
3.6
at the more recent history, very few countries have managed to
Mexico
1983-2001
19
4.0
South Africa
1999-2000
2
3.5
sustain high primary balances (Table 1). In the eurozone, only two
South Africa
2006-2007
2
3.6
countries (Ireland and Belgium) managed to sustain primary
Bulgaria
1994-2008
15
4.4
Turkey
2000-2008
9
4.6
balances of at least 3½ percent of GDP for longer than a decade,
Brazil
2004-2008
5
3.5
and only Ireland was able to do so with double digit
Argentina
2004-2006
3
3.6
unemployment rates. The projection that Greece will have such
Source: WEO.
double digit unemployment rates until the middle of the century
1/ The period with high PB is defined as the period starting from the
year with the PB equal to or higher than 3.5 percent of GDP to the year
must temper assumptions regarding the sustainability of very high
that 1) the PB is positive and 2) the average of PB from the beginning
primary surpluses.
year equals to or higher than 3.5 percent of GDP.

13

Box 2. What is Driving Greek Growth in the Long-Term?
Long-run growth depends on three factors: (i) labor force developments; (ii) capital accumulation; and (iii) total
factor productivity (TFP). In the face of significant demographic challenges, which imply a decline in workingage population over time, and investment rates that are unlikely to return to the unsustainable pre-crisis levels,
total factor productivity (TFP)—driven by structural reforms— will be the main driver of growth. Given Greece’s
uneven track record of reform implementation, long-term growth has been revised down to 1¼ percent.
The contribution of labor to growth is expected to be negative. Demographic projections suggest that
working age population will decline by about 10 percentage points by 2060. At the same time, Greece will
continue to struggle with high unemployment rates for decades to come. Its current unemployment rate is
around 25 percent, the highest in the OECD, and, after seven years of recession, its structural component is
estimated at around 20 percent. Consequently, it will
Working Age (15-64) Population Prospects
(Percentage growth rate)
take significant time for unemployment to come
0.2
Greece
Euro Area
down. Staff expects it to reach 18 percent
0.0
by 2022, 12 percent by 2040, and 6 percent only
-0.2
by 2060; labor force participation is expected to
-0.4
increase gradually from 68 to around 73 percent, in
-0.6
-0.8
line with the overall euro area trends. This suggests
-1.0
that the contribution of labor to long-run growth
-1.2
would be around -0.3 percent (derived as the change
-1.4
in employment growth, -0.6 percent per year, on
-1.6
average, times the share of labor in total income,
2015
2020
2025
2030
2035
2040
2045
2050
Sources: 2015 EC Aging Report; and IMF staff estimates.
which is around a half).
The contribution of capital to growth is likely to be positive, but small. Investment as a share of GDP
fell from around 20 to about 12 percent since the crisis. While investment is expected to recover over the
medium term, including as a result of the need to replace capital and inventories, it is unlikely to return to
the high pre-crisis levels, which relied on external financing (and hence an unsustainable current account).
Moreover, the financial sector is unlikely to be able
Investment and Current Account
(Percent of GDP)
to support investment growth for the foreseeable
0
30
Investment
Current Account (rhs)
future, as it still struggles with exceptionally high
25
NPLs (44 percent, the second highest in the euro-3
zone). That said, staff expects the investment ratio to
20
-6
increase by about 30 percent to 17 percent of GDP
15
over the medium and long run, a level still somewhat
-9
10
below the euro-area average. Therefore, the
-12
contribution of capital to growth is expected to be
5
only around 0.5 percent (derived as the change in
0
-15
capital stock, of about 1 percent on average, after
2001
2003
2005
2007
2009
2011
2013
Source: Haver Analytics.
accounting for depreciation, times the share of
capital in total income of about ½).

14
Box 2. What is Driving Greek Growth in the Long-Term? (concluded)

GDP Growth

Growth, therefore, depends critically on the contribution of TFP, driven by structural reforms.
From 1970 until 2008, average annualized TFP growth in the euro area was 1.2 percent. Greece had the
lowest TFP (0.7 percent, including the unsustainable pre-crisis boom period). Looking forward, TFP is a
function of the ambitiousness of structural reforms. However, the record of reform implementation in
Greece over the past six years has been uneven. Despite numerous legislative initiatives, with the exception
of the 2011 labor market reforms, the implementation of product market reforms has lagged. And the
authorities’ efforts and commitments in the new ESM program remain limited or incomplete. In this context,
it is no longer plausible to assume that Greece could
TFP and GDP Growth, 1970−2008
(Percent)
reach TFP rates well above the euro-area average. A
5.0
IRL
more realistic assumption is that Greece’s reform
4.5
effort would be commensurate with bringing TFP
LUX
4.0
growth to around 1 percent, slightly below the
historical euro-area average. This, together with the
3.5
PRT
contributions of labor and capital would imply a longFIN
3.0
AUT NLD
run growth rate of 1¼ percent. This is still slightly
GRC
2.5
above the 1 percent rate projected in the 2015 EC’s
FRA BEL
ITA
Ageing Report and requires continued structural
2.0
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
reforms to be delivered at a much faster pace than
TFP Growth
Source: AMECO.
achieved so far.

15

Box 3. Key Assumptions in the DSA
In addition to the fiscal and growth assumptions described in the text, the following elements underpin
staff’s baseline DSA projections:
Bank recapitalization needs: The banking sector was recapitalized last December, following the SSM bank
comprehensive assessment that identified capital needs of €15 billion. The ESM program envelope set aside
€25 billion for bank recapitalization. Of this, €5.4 billion was utilized in December, with the remainder of needs
covered by private capital. Despite successive recapitalizations—which added around €43 billion
(over 24 percent of GDP) to public debt since 2010—non-performing loans continued to rise to 44 percent of
total loans at end-December (the second highest in the euro-area), and banks’ capital remains excessively
reliant on deferred tax assets (DTAs), which amount to close to €20 billion and constitute half of capital (the
highest in the euro-area). In this context, staff considers that a buffer of around €10 billion should be set aside
to cover potential additional bank capital needs (this corresponds to about half of the amount of DTAs).
Privatization proceeds: Despite Greece’s commitment to set up a €50 billion privatization fund as part of its
ESM-supported program, staff has not revised its privatization projections since June, which amount to €5
billion during 2015-2030 (€2 billion by 2018). These projections are seen as more realistic, given Greece’s poor
record in meeting privatization targets under its previous programs. (Over the last five years, cumulative
privatization proceeds amounted to only around €3
Projected Annual Privatization Proceeds
(Billions of euros)
billion, or just 6 percent of overall targeted receipts of
16
€50 billion and 12 percent of receipts expected
14
through 2022.) The previous targets included significant
4th SBA Review (July 2011)
12
expected receipts from bank privatization. However, as
10
noted above, despite the large capital injections
8
since 2010, the state has not been able to recover its
6
EFF Request (March 2012)
investment in the banks; on the contrary, following the
4
5th EFF Review (May 2014)
most recent recapitalization, the state’s share in the
2
Actual Proceeds
Current Projection
banking sector has been reduced to around 20 percent
0
2012
2013
2014
2015
2016
2017
2018
(from around 60 percent). As a result, staff does not
Source: IMF program reviews.
expect material proceeds from bank privatization.
Additional financing needs: Tight financing conditions in the first half of 2015 resulted in the accumulation of
significant arrears (which reached about €7 billion in total), including unprocessed pension and tax refund
claims, and in a draw-down of the state’s deposits. Moreover, the state resorted to borrowing from other state
entities through repo operations (€10.4 billion). As in the June 2015 DSA, staff projects that arrears will be
cleared and deposit buffers rebuilt to reach medium-term coverage of eight-months of forward-looking
financing needs (€8 billion). In addition, the repo operations not to be covered by the Treasury Single Account
would need to be unwound (€4.4 billion).

16
Box 3. Key Assumptions in the DSA (concluded)
Official interest rates: Greece is benefitting from very low nominal official interest rates (weighted average of
around 1.2 percent), supported by the exceptional relaxation in monetary conditions in the euro zone. Since
the rates are variable, they are expected to revert to their
Greece: Interest Rates, 2015−2060
(Percent)
historical averages over the long run as financing
10
Implicit rate
Market rate
EFSF
ESM
Euribor
conditions normalize. The long-run risk-free rate is
9
8
assumed at 3.8 percent and is based on the end-point
7
medium-term forecast for euro area growth (1.5 percent),
6
achievement of the ECB’s price stability objective (1.9
5
percent), and a modest wedge over the sum of the two,
4
3
consistent with what has been observed historically.
2
Official interest rates eventually reach 3.8 percent
1
approximately 7 years after the risk-free rate reaches its
0
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
steady state level in 2025, reflecting that it takes time to
Source: IMF staff estimates.
roll over EFSF/ESM funding at higher rates.
Market interest rates: Greece is assumed to access markets by end-program at an initial rate of 6 percent,
reflecting a prolonged absence from markets, weak track record on delivering fiscal surpluses, and a
substantial debt overhang. The rate is lower than the average yield during January-May 2016 by around 300
basis points, and is in line with the rates obtained by the country in 2014 when it was able to temporarily issue
on the markets. It is consistent with a risk-free rate of 1-1½ percent in 2018 and a risk premium of 450-500
basis points (broadly consistent with an increase in the premium of four basis points for each 1 percent of GDP
in debt above the Maastricht limit). Regression analysis suggests that staff’s assumption is at the low
(optimistic) end of estimates. A variety of empirical specifications regressing sovereign yields on key
macroeconomic fundamentals (debt-to-GDP, debt-to-GDP squared, growth, primary balance, inflation, as well
as country and time fixed effects) suggests a range of estimates between 6 and 13 percent (Table 1). As to its
evolution over time, the rate is expected to fall/rise by four basis points for every one percentage point
decline/increase in debt-to-GDP ratio, in line with the literature (Laubach, 2009, Ardagna, Casseli, Lane, 2004,
Engen and Hubbard, 2004), up to a floor of 4½ percent (consistent with a small long-run risk free premium of
75 basis points).

17
Table 1. Regression Results

Gross debt (% of GDP)

(1)

(2)

(3)

(4)

(5)

(6)

0.0286***
(0.00655)

0.0223**
(0.0105)

0.205***
(0.0581)
-0.380***
(0.0786)
0.518***
(0.161)
1.036
(1.134)

-0.124***
(0.0293)
0.000814***
(0.000154)
0.0397
(0.0626)
-0.237***
(0.0780)
0.652***
(0.152)
6.803***
(1.520)

0.0445***
(0.0106)

0.0289
(0.0534)
-0.229***
(0.0766)
0.731***
(0.151)
0.416
(0.713)

-0.140***
(0.0209)
0.000947***
(0.000113)
-0.0463
(0.0464)
-0.163**
(0.0658)
0.777***
(0.129)
6.640***
(0.962)

0.246***
(0.0473)
-0.801***
(0.0739)
-0.334**
(0.164)
3.995***
(1.082)

-0.0338
(0.0218)
0.000455***
(0.000113)
0.125**
(0.0540)
-0.652***
(0.0796)
-0.147
(0.163)
6.771***
(1.239)

187
0.230

187
0.444

187
0.389
YES

187
0.475
YES

187
0.769
YES
YES

187
0.791
YES
YES

Gross debt (% of GDP) squared
Primary blance (% of GDP)
Real GDP growth
CPI inflation
Constant

Observations
R-squared
Country FE
Year FE

Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1

18

Greece Public DSA Risk Assessment (Restructuring Scenario with Deferrals and Fixed Rates)
Heat Map
Debt level 1/

Gross financing needs 2/

Real GDP
Primary
Growth Shock Balance Shock

Real Interest Exchange Rate Contingent
Rate Shock
Shock
Liability shock

Real GDP
Primary
Growth Shock Balance Shock

Real Interest Exchange Rate Contingent
Rate Shock
Shock
Liability Shock

Market
Perception

Debt profile 3/

Change in the Public Debt
External
Share of Short- Held by NonFinancing
Residents
Requirements
Term Debt

Foreign
Currency
Debt

Evolution of Predictive Densities of Gross Nominal Public Debt
(Percent of GDP)
Baseline
240

10th-25th

Percentiles:

Symmetric Distribution

220

25th-75th

240

240

75th-90th
240

Restricted (Asymmetric) Distribution

220

220

200

200

200

200

180

180

180

180

160

160

160

160

140

140

140

120

120

120

100

100

100

80
2014

2016

2018

2020

2022

2024

2026

80
2030

2028

220

140

Restrictions on upside shocks:
no restriction on the growth rate shock
no restriction on the interest rate shock
0 is the max positive pb shock (percent GDP)
no restriction on the exchange rate shock

80
2014

2016

2018

2020

2022

2024

120
100
2026

2028

80
2030

Debt Profile Vulnerabilities
(Indicators vis-à-vis risk assessment benchmarks)
Greece

Lower early warning

Upper early warning

Not applicable
for Greece

600

25

1.5

45

400

17

1

30

1

2

1

2

Bond Spread over
German Bonds

External Financing
Requirement 5/

(Basis points) 4/

(Percent of GDP)

Annual Change in
Short-Term Public
Debt
1

2

(Percent of total)

1

2

1

2

Public Debt Held
by Non-Residents

Public Debt in
Foreign Currency

(Percent of total)

(Percent of total)

Source: IMF staff.
1/ The cell is highlighted in green if debt burden benchmark of 85% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not
baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.
2/ The cell is highlighted in green if gross financing needs benchmark of 20% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock
but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.
3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark,
yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white.
Lower and upper risk-assessment benchmarks are:
400 and 600 basis points for bond spreads; 17 and 25 percent of GDP for external financing requirement; 1 and 1.5 percent for change in the share of short-term debt;
30 and 45 percent for the public debt held by non-residents.
4/ An average over the last 3 months, 17-Feb-16 through 17-May-16.
5/ Includes liabilities to the Eurosystem related to TARGET.

19
Greece Public DSA - Realism of Assumptions (Restructuring Scenario with Deferrals and Fixed Rates)
Forecast Track Record, versus program countries
Real GDP Growth

Primary Balance

pessimistic

Greece median forecast error, 2007-2015:
Has a percentile rank of:

-3.15
3%

4
2
0

4

4

12

2

2

10

8

2

0

0

8

6

-2

-2

-4

-4

-6

-6

optimistic

-2

-10

-12
2007

-4

Median
2008

2009

2010

2011

2012

2013

2014

-6

-10

-8

-12

-10
2015

Distribution of forecast
errors: 1/

-8

-8
-10

Interquartile range (25-75)

-14
2007

-12

Median
2008

2009

2010

2011

2012

2013

2014

-14
2015

6

2

2
0
-2
-4
-6

-8
2007

2008

Distribution 3/
has a percentile
rank of 62%

10

14

12

12

10

10

8

Distribution 3/

8

12

8

10

6

8

4
2
0

8

More

7

6

5

4

3

2

1

0

-1

8

More

7

6

5

4

3

2

1

0

0

0

-1

0

-2

2

-3

2

2

-4

2012

2013

2014

-8
2015

4
2
0

-2

4

4

-3

4

6

-4

6

6

Less

6

2011

Real GDP growth

3-year average CAPB level
greater than 3.5 percent of
GDP in approx. top quartile

has a percentile
rank of 50%

-6

(in percent)
Greece

8

Less

2010

-4

Year 2/

(Percent of GDP)

3-year CAPB adjustment
greater than 3 percent of
GDP in approx. top quartile

12

2009

-2

Boom-Bust Analysis 3/

3-Year Average Level of Cyclically-Adjusted
Primary Balance (CAPB)

(Percent of GDP)

0

Distribution of forecast
errors: 1/
Interquartile range
(25-75)
Median

Assessing the Realism of Projected Fiscal Adjustment
3-Year Adjustment in Cyclically-Adjusted
Primary Balance (CAPB)

10

4

4

Year 2/

Year 2/

14

-0.76
21%

Greece median forecast error, 2007-2015:
Has a percentile rank of:

4

-4

-8

-2.21
16%

6

0
Distribution of forecast
errors: 1/
Interquartile range
(25-75)

(Percent, actual-projection)

Greece median forecast error, 2007-2015:
Has a percentile rank of:

-2

-6

Inflation (Deflator)

(Percent of GDP, actual-projection)

(Percent, actual-projection)

-2
-4
-6
t-5

t-4

t-3

Source : IMF Staff.
1/ Plotted distribution includes program countries, percentile rank refers to all countries.
2/ Projections made in the spring WEO vintage of the preceding year.
3/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.

t-2

t-1

t

t+1 t+2 t+3 t+4 t+5

20
Figure 1. Greece: Public Sector Debt Sustainability Analysis (DSA) - Restructuring Scenario with Deferrals and Fixed Rates
(Percent of GDP, unless otherwise indicated)
Debt, Economic and Market Indicators 1/
Actual

As of May 17, 2016

Projections

2005–2013 2/

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Sovereign Spreads

Nominal gross public debt
Public gross financing needs

134.0
11.9

180.1
24.9

176.9
22.5

183.7
17.9

185.3
19.1

184.9
16.3

178.7
13.0

173.1
8.2

168.8
6.1

165.6
5.4

162.4
5.7

159.4
9.0

156.3
6.5

153.2
6.3

150.2
5.8

147.1
5.8

144.0
7.5

140.8
5.9

Spread (bp) 3/
CDS (bp)

Real GDP growth (percent)
Inflation (GDP deflator, percent)
Nominal GDP growth (percent)
Effective interest rate (percent) 4/

-2.2
1.6
-0.6
4.2

0.7
-2.2
-1.6
2.2

-0.2
-0.6
-0.9
2.1

0.0
-0.2
-0.2
1.1

2.9
0.7
3.7
1.2

3.2
1.3
4.5
1.1

2.8
1.5
4.3
1.1

2.4
1.7
4.1
1.1

1.8
1.8
3.6
1.2

1.3
1.9
3.2
1.3

1.3
1.9
3.2
1.3

1.2
1.9
3.2
1.3

1.3
1.9
3.2
1.2

1.3
1.9
3.2
1.2

1.2
1.9
3.2
1.2

1.2
1.9
3.2
1.1

1.3
1.9
3.2
1.1

1.2
1.9
3.2
1.1

2024

2025

2026

2027

2028

2029

2030

723
1029

Ratings
Moody's
S&Ps
Fitch

Foreign
Caa3
BCCC

Local
Caa3
BCCC

Cumulative

Debt-stabilizing
primary balance 9/
-3.1

Contribution to Changes in Public Debt
Actual

Projections

2005–2013

2014

2015

2016

Change in gross public sector debt

9.2

1.5

-1.5

Identified debt-creating flows
Primary deficit
Primary (noninterest) revenue and grants
Primary (noninterest) expenditure
Automatic debt dynamics 5/
Interest rate/growth differential 6/
Of which: real interest rate
Of which: real GDP growth
Exchange rate depreciation 7/
Other identified debt-creating flows
Net privatization proceeds
Contingent liabilities
Other liabilities (bank recap. and PSI sweetner)
Residual, including asset changes 8/

16.7
3.3
41.9
45.3
7.7
7.8
3.6
4.1
-0.1
5.7
-0.1
1.0
4.8
-7.6

8.6
0.0
46.8
46.8
8.6
6.9
8.0
-1.2
1.7
0.0
-0.3
0.3
0.0
-7.1

-0.2
-0.7
48.1
47.3
7.2
5.4
4.9
0.4
1.8
-6.7
-0.1
-3.4
-3.1
-1.3

80

2017

2018

6.8

1.6

-0.4

-6.2

-5.6

-4.3

-3.2

-3.1

-3.0

-3.1

-3.1

-3.1

-3.1

-3.1

-3.1

-36.1

7.9
0.5
45.6
46.1
2.3
2.3
2.3
0.0
…
5.2
-0.3
5.5
0.0
-1.2

-0.9
-0.3
44.5
44.3
-4.5
-4.4
0.7
-5.2
…
3.8
-0.5
4.4
0.0
2.4

4.4
-1.5
43.2
41.7
-6.1
-6.0
-0.4
-5.7
…
12.0
-0.7
7.4
5.3
-4.8

-7.6
-1.5
42.5
41.0
-5.7
-5.7
-0.7
-5.0
…
-0.4
-0.2
-0.2
0.0
1.3

-7.0
-1.5
41.9
40.4
-5.1
-5.1
-1.0
-4.1
…
-0.3
-0.2
-0.2
0.0
1.4

-5.7
-1.5
41.6
40.1
-4.0
-4.0
-1.0
-3.0
…
-0.1
-0.1
-0.1
0.0
1.4

-4.7
-1.5
41.6
40.1
-3.1
-3.1
-1.0
-2.0
…
-0.1
-0.1
-0.1
0.0
1.5

-4.7
-1.5
41.6
40.1
-3.0
-3.0
-1.0
-2.0
…
-0.1
-0.1
-0.1
0.0
1.5

-4.6
-1.5
41.6
40.1
-3.0
-3.0
-1.0
-2.0
…
-0.1
-0.1
-0.1
0.0
1.6

-4.7
-1.5
41.6
40.1
-3.1
-3.1
-1.1
-1.9
…
-0.1
-0.1
-0.1
0.0
1.6

-4.7
-1.5
41.6
40.1
-3.0
-3.0
-1.2
-1.9
…
-0.1
-0.1
-0.1
0.0
1.6

-4.6
-1.5
41.6
40.1
-3.0
-3.0
-1.2
-1.9
…
-0.1
-0.1
-0.1
0.0
1.6

-4.6
-1.5
41.6
40.1
-3.0
-3.0
-1.2
-1.8
…
-0.1
-0.1
-0.1
0.0
1.5

-4.6
-1.5
41.6
40.1
-3.0
-3.0
-1.2
-1.8
…
-0.1
-0.1
-0.1
0.0
1.5

-4.6
-1.5
41.6
40.1
-3.0
-3.0
-1.3
-1.7
…
-0.1
-0.1
-0.1
0.0
1.5

-50.6
-19.2
634.2
614.9
-50.4
-50.3
-10.3
-40.0
…
19.1
-2.4
16.3
5.3
14.4

80

40

40

20

20

Debt-Creating Flows (Percent of GDP)

2019

2020

2021

2022

2023

Primary deficit

Real GDP growth

60

40

Real interest rate

Exchange rate depreciation

40

20

Other debt-creating flows

Residual

20

0

0

0

-20

-20

-20

60

-40
-60

-40
Proj.

-80

-60
-80

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

0
-20
-40

-40

-60

-60

-80

-80

-100
cumulative

Source: IMF staff projections.
1/ Public sector is defined as general government.
2/ Based on available data.
3/ Bond Spread over German Bonds.
4/ Defined as interest payments divided by debt stock at the end of previous year.
5/ Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).
6/ The real interest rate contribution is derived from the denominator in footnote 4 as r - π (1+g) and the real growth contribution as -g.
7/ The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).
8/ For projections, this line includes exchange rate changes during the projection period. Also includes ESM capital contribution, arrears clearance, SMP and ANFA income, and the effect of deferred interest.
9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

21
Greece Public DSA - Composition of Public Debt and Alternative Scenarios (Restructuring Scenario with Deferrals and Fixed Rates)
Composition of Public Debt
250

250

250

225

225

200

200

175

175

175

175

150

150

150

150

125

125

125

125

100

100

100

100

75

75

75

75

50

50

50

50

25

25

0

0

250
225
200

By Maturity (Percent of GDP)
Medium and long-term
Short-term

Proj.

25
0
2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

By Currency (Percent of GDP)

200

Foreign currency-denominated

25

Proj.

0

2006

2030

225

Local currency-denominated

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

Alternative Scenarios
Restructuring scenario
350

Historical

Constant Primary Balance
50

300

Gross Nominal Public Debt (Percent of GDP)

300

250

250

200

200

50

Public Gross Financing Needs (Percent of GDP)

40

40

30

30

20

20

150
150
100

100

10

50

50

10

Proj.

Proj.

0
2014

0
2016

2018

2020

2022

2024

2026

2028

0
2014

2030

2016

2018

2020

2022

2024

2026

0
2030

2028

Underlying Assumptions
(Percent)
Restructuring scenario

2016

2017

2018

2019

2020

2021

2022

2025

2030

Historical scenario

Real GDP growth

0.0

2.9

3.2

2.8

2.4

1.8

1.3

1.3

1.2

Inflation
Primary balance

-0.2
-0.5

0.7
0.3

1.3
1.5

1.5
1.5

1.7
1.5

1.8
1.5

1.9
1.5

1.9
1.5

1.9
1.5

Effective interest rate

1.1

1.2

1.1

1.1

1.1

1.2

1.3

1.2

1.1

Constant primary balance scenario
Real GDP growth

0.0

2.9

3.2

2.8

2.4

1.8

1.3

1.3

1.2

Inflation
Primary balance
Effective interest rate

-0.2
-0.5
1.1

0.7
-0.5
1.3

1.3
-0.5
1.2

1.5
-0.5
1.2

1.7
-0.5
1.3

1.8
-0.5
1.4

1.9
-0.5
1.5

1.9
-0.5
1.5

1.9
-0.5
1.4

Source: IMF staff.

2016

2017

2018

2019

2020

2021

2022

2025

2030

Real GDP growth

0.0

-2.0

-2.0

-2.0

-2.0

-2.0

-2.0

-2.0

-2.0

Inflation
Primary balance

-0.2
-0.5

0.7
-2.8

1.3
-2.8

1.5
-2.8

1.7
-2.8

1.8
-2.8

1.9
-2.8

1.9
-2.8

1.9
-2.8

Effective interest rate

1.1

1.3

1.6

1.8

2.0

2.3

2.5

2.7

2.7

22

Greece Public DSA - Stress Tests (Restructuring Scenario with Deferrals and Fixed Rates)
Macro-Fiscal Stress Tests
Restructuring scenario

Primary Balance Shock

Real GDP Growth Shock

Real Exchange Rate Shock

Real Interest Rate Shock

Public Gross Financing Needs

Gross Nominal Public Debt

Gross Nominal Public Debt

(Percent of GDP)

(Percent of Revenue)

250

250

550

550

225

225

500

500

200

200

450

450

175

175

150

150

400

400

125

125

350

350

100
2016

2018

2020

2022

2024

2026

2028

100
2030

300
2016

2018

2020

2022

2024

2026

2028

300
2030

(Percent of GDP)
40

40

30

30

20

20

10

10

0
2016

2018

2020

2022

2024

2026

2028

0
2030

Additional Stress Tests
Restructuring scenario

Contingent Liability Shock

Combined Macro-Fiscal Shock

Lower growth scenario

Gross Nominal Public Debt

(Percent of GDP)

Gross Nominal Public Debt

Public Gross Financing Needs

(Percent of Revenue)

(Percent of GDP)
40

40

30

30

20

20

10

10

250

250

550

550

225

225

500

500

200

200

450

450

175

175

150

150

400

400

125

125

350

350

100
2016

2018

2020

2022

2024

2026

2028

100
2030

300
2016

2018

2020

2022

2024

2026

2028

300
2030

0
2016

2018

2020

2022

2024

2026

2028

0
2030

2017

2018

2019

2020

2021

2022

2025

2030

Underlying Assumptions
(Percent)
2016

2017

2018

2019

2020

2021

2022

2025

2030

Primary Balance Shock

2016
Real GDP Growth Shock

Real GDP growth

0.0

2.9

3.2

2.8

2.4

1.8

1.3

1.3

1.2

Real GDP growth

0.0

-1.8

-1.5

2.8

2.4

1.8

1.3

1.3

1.2

Inflation
Primary balance

-0.2
-0.5

0.7
-1.4

1.3
-0.2

1.5
1.5

1.7
1.5

1.8
1.5

1.9
1.5

1.9
1.5

1.9
1.5

Inflation
Primary balance

-0.2
-0.5

-0.4
-2.4

0.1
-3.6

1.5
1.5

1.7
1.5

1.8
1.5

1.9
1.5

1.9
1.5

1.9
1.5

Effective interest rate

1.1

1.2

1.1

1.2

1.2

1.3

1.4

1.3

1.1

Effective interest rate

1.1

1.3

1.3

1.4

1.4

1.5

1.6

1.5

1.3

Real Exchange Rate Shock
Real GDP growth

Real Interest Rate Shock
Real GDP growth

0.0

2.9

3.2

2.8

2.4

1.8

1.3

1.3

1.2

Inflation
Primary balance

-0.2
-0.5

0.7
0.3

1.3
1.5

1.5
1.5

1.7
1.5

1.8
1.5

1.9
1.5

1.9
1.5

1.9
1.5

Effective interest rate

1.1

1.3

1.8

2.0

2.3

2.5

2.7

2.8

2.9

Combined Shock

0.0

2.9

3.2

2.8

2.4

1.8

1.3

1.3

1.2

Inflation
Primary balance

-0.2
-0.5

1.1
0.3

1.3
1.5

1.5
1.5

1.7
1.5

1.8
1.5

1.9
1.5

1.9
1.5

1.9
1.5

Effective interest rate

1.1

1.3

1.2

1.2

1.2

1.3

1.4

1.3

1.1

Contingent Liability Shock

Real GDP growth

0.0

-1.8

-1.5

2.8

2.4

1.8

1.3

1.3

1.2

Real GDP growth

0.0

-1.8

-1.5

2.8

2.4

1.8

1.3

1.3

1.2

Inflation
Primary balance

-0.2
-0.5

-0.4
-2.4

0.1
-3.6

1.5
1.5

1.7
1.5

1.8
1.5

1.9
1.5

1.9
1.5

1.9
1.5

Inflation
Primary balance

-0.2
-0.5

-0.4
-13.8

0.1
1.5

1.5
1.5

1.7
1.5

1.8
1.5

1.9
1.5

1.9
1.5

1.9
1.5

Effective interest rate

1.1

1.3

1.9

1.6

1.6

1.7

1.8

1.7

1.5

Effective interest rate

1.1

1.3

1.8

2.2

2.4

2.6

2.8

3.0

3.1

Real GDP growth

0.0

1.9

2.2

1.8

1.4

0.8

0.3

0.3

0.2

Inflation
Primary balance

-0.2
-0.5

0.7
0.3

1.3
1.5

1.5
1.5

1.7
1.5

1.8
1.5

1.9
1.5

1.9
1.5

1.9
1.5

Effective interest rate

1.1

1.3

1.2

1.3

1.3

1.4

1.4

1.4

1.2

Lower Growth Scenario

Source: IMF staff.