Greece Doubts Persist

February 21, 2012 by staff 

Greece Doubts Persist, Greece may have dodged a default with its last-minute bailout deal but longer-term doubts over its ability to repay its staggering debts remain, raising questions about whether even more rescue money will eventually be needed.

European leaders were to sign off on Greece’s second bailout of around €130 billion, or $172 billion, at their summit meeting in Brussels next week — subject to Greece taking immediate steps to put the deep structural changes that they agreed to into effect.

Greece must also persuade, if not actually force, its private sector bond holders to accept a higher than expected loss of more than 70 percent on their holdings to reduce Greece’s debt stock by the targeted amount of €100 billion.

It is uncertain, however, if another round of austerity can bring Greece to a point whereby it generates enough revenue to pay off its obligations — even if the private sector debt deal goes through — and return to the market on its own.

Europe’s leaders hailed the last minute steps, which included a reduction in interest rates on loans from Greece’s first rescue in 2010, and European central banks foregoing profit on their Greek bond holdings, that allowed the deal to satisfy a mandate set by the International Monetary Fund that Greece’s debt come down to 120.5 percent of gross domestic product by 2020.

In recent weeks, the fund had circulated a confidential study of Greece’s long term debt prospects which argued that reduced growth and the inability of Greece to implement needed reforms could swell the country’s debt to 178 percent of G.D.P. by 2015 and still leave it at 160 percent of G.D.P. by 2020.

That being the case, the fund would not be able to lend Greece any more money, thus raising the prospect that default was the only option for the debt-strapped country

Butanlysts point out that the very practice of trying toanlyze what a country’s debt will be eight years on is in itself flawed — as the I.M.F. itself has accepted in a recent report that explained how it missed debt explosions in Greece, Ireland and Iceland.

And they question how, in a matter of months, Greece’s debt outlook in 2020 can change so quickly — going from 120 percent of G.D.P. last October, to a worst case scenario of 160 percent and now back down again to 120 percent.

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