If the IMF were a Greek citizen, it would vote "No" in this weekend's referendum.
According to a report prepared prior to capital controls and the banking sector meltdown, any deal that included creditor concessions on fiscal reforms would mean Greece's debt load would have to be written down, as the country would need at least €60 billion in new financing.
This should not come as a surprise to our readers because long before Greece returned to the spotlight we reported last October, citing an S&P report, that by the end of 2015 Greek financing would be at least €43 billion. What we said then: "As for Greece, it appears that suddenly the idyllic image of its recovery is about to be torn to shreds and the Syntagma riotcam will have to come out of hibernation."
We were right about the former, still waiting for the riotcam. We were also right about this:
In other words, Greece will default the second the people start protesting the crushing, and very simple math, and they decide they have had enough of the technocrat and appoint another president. Because, you see, it is not that Greece implemented zero reform, and rooted out the pervasive cooruption that saw billions in foreign "aid" end up in offshore bank accounts of the political oligarchy, or the simple math of sources and uses of funds: it is the danger of the Greek people returning to what they did best in those days of 2010 and 2011 when every other day saw a riot in the center of Athens, that will be the straw that finally breaks the camel's back.
And thus we go back to square one, as we always said we would, when only timing was a matter of debate. Well, we now know the timing: T minus 15 months and counting to yet another Eurozone collapse.
Actually the collapse may have come earlier than that: some 6 months so, depending on what the vote in Sunday's referendum is.
But back to the IMF's report which underscores the Fund's long-standing position that EU creditors will ultimately need to write down their holdings if Greece has any hope of returning to a situation where the country's debt-to-GDP ratio is "sustainable," and suggests Syriza is indeed making a smart move by holding out.
- COMPREHENSIVE DEBT OPERATION IS REQUIRED TO RETURN GREECE TO ECONOMIC HEALTH
- GREECE NEEDS EITHER A DEBT WRITE-DOWN OR MATURITY EXTENSIONS UNDER LATEST CREDITOR PROPOSAL
- GREECE'S ADDITIONAL FINANCING NEEDS THROUGH 2018 TOTAL ABOVE EUR60 BILLION
- GREECE'S YEAR-AHEAD FINANCING NEEDS ALONE TOTAL EUR29 BILLION
- CAPITAL CONTROLS ARE LIKELY TO PUSH UP FINANCING AND DEBT RELIEF NEEDS
- "IMPERATIVE" EUROZONE COVERS AT LEASE EUR36 BILLION IN FINANCE UNDER HIGHLY CONCESSIONAL TERMS
- IMF PROPOSES EXTENDING GREECE'S DEBT MATURITY TO 40 YEARS FROM 20 YEARS CURRENTLY
- TO MEET THE 2012 DEBT-SUSTAINABILITY TARGETS FOR GREECE, EUROPE WOULD HAVE TO WRITE DOWN DEBT BY 30% GDP
- GREECE'S DEBT IS UNSUSTAINABLE WITHOUT DEBT RELIEF UNDER EUROZONE'S LAST GREEK BAILOUT OFFER
- EUROZONE MUST PROVIDE DEBT MATURITY EXTENSION "AT A MINIMUM"
- GREEK DEBT-SUSTAINABILITY REVIEW ASSUMES LONG-TERM AVERAGE REAL GDP GROWTH OF 1%
- LONG-TERM AVERAGE REAL GDP GROWTH OF 1% FOR GREECE MAY BE OPTIMISTIC
- A LOWER BUDGET TARGET THAN LAST GREEK CREDITOR OFFER WOULD REQUIRE EUR50 BILLION DEBT WRITE-DOWN
- A LOWER BUDGET TARGET THAN LAST GREEK CREDITOR OFFER WOULD ALSO NEED CONCESSIONAL FINANCING THROUGH 2020
- EVEN WITH DEBT RELIEF, LAST CREDITOR BAILOUT OFFER WOULD STILL SEE GREECE'S DEBT RATIO AT 142% GDP THROUGH 2022
- IMF ASSUMES GREEK GDP GROWTH OF 0% IN 2015, 2% IN 2016 AND 3% IN 2017
- A GROWTH SHOCK WOULD SPIKE GREECE'S DEBT RATIO TO 200% OF GDP IN 2017
What this means is that the Troika "joint" position just fractured, and the Greek demands for more debt writedowns, so vociferously rejected by the Eurogroup, were actually valid.
Here's more, via MNI:
The report was drafted before the shutdown of the Greek banking sector and is dated June 26. Although the report has "not been approved (by the) IMF's Executive Board" it concludes that Greece has "substantial financing needs" which would render the debt dynamics unsustainable.
The report argued that any agreement for a softer reforms package such as lower primary surpluses, weaker structural reforms or lower than expected privatization revenues would make the haircuts on the debt "necessary."
"Using the thresholds agreed in November 2012, a haircut that yields a reduction in debt of over 30% of GDP would be required to meet the November 2012 debt targets," it added.
And the punchline from the IMF's report (attached below), which may be just the push the Oxi vote needs to win on Sunday (and why stocks are suddenly swooning following this report):
Even with concessional financing through 2018, debt would remain very high for decades and highly vulnerable to shocks. Assuming official (concessional) financing through end–2018, the debt-to-GDP ratio is projected at about 150 percent in 2020, and close to 140 percent in 2022 (see Figure 4ii). Using the thresholds agreed in November 2012, a haircut that yields a reduction in debt of over 30 percent of GDP would be required to meet the November 2012 debt targets. With debt remaining very high, any further deterioration in growth rates or in the mediumterm primary surplus relative to the revised baseline scenario discussed here would result in significant increases in debt and gross financing needs (see robustness tests in the next section below). This points to the high vulnerability of the debt dynamics.
It gets better:
A lower medium-term primary surplus of 2½ percent of GDP and lower real GDP growth of 1 percent per year would require not only concessional financing with fixed interest rates through 2020 to cover gaps as well as doubling of grace and maturities on existing debt but also a significant haircut of debt, for instance, full write-off of the stock outstanding in the GLF facility (€53.1 billion) or any other similar operation. The debt-to-GDP ratio would decline immediately, but “flattens” afterwards amid low economic growth and reduced primary surpluses. The stock and flow treatment, nevertheless, are able to bring the GFN-to-GDP trajectory back to safe ranges for the next three decades (Figure 8)
Well, yes. As we can't tire of showing:
Also recall that in 2011, Citi estimated that if Athens waited until 2015, a haircut of 94% would be necessary to bring the debt-to-GDP ratio down to 60%:
What happens next? All the other peripheral nations - Spain, Italy, Portugal, show up at the IMF's door and ask if their debt, shown below, is also now deemed unsustainable.
Full IMF report: