ATHENS (Reuters) - Relief measures agreed with Greece’s official creditors to help render its debt load sustainable will help smooth the country’s return to market financing, the Bank of Greece said in a monetary policy report on Monday.
But it warned that in the longer term, debt sustainability will hinge on maintaining fiscal and reform efforts and further debt relief by its euro zone creditors.
Last week euro zone finance ministers extended maturities and deferred interest payments on 96 billion euros worth of Greek debt, about one third of the country’s overall debt pile.
Greece has the highest debt-to-GDP ratio in the euro zone, at almost 180 percent of its national output.
Greece is set to exit a three-year bailout program worth up to 86 billion euros in August. It is the third rescue program the country has required since it toppled into crisis in 2010, when fiscal slippage blocked its access to external funding from bond markets.
“The sustainable return of the Greek state to the international sovereign bond markets will be the ultimate and definitive proof that the economy has overcome the crisis,” the central bank said in its report.
“Any other outcome would undermine growth prospects and give rise to serious problems.”
The Bank of Greece said the Eurogroup’s decision on debt relief ensures the sustainability of Greece’s debt “at least in the medium term”, which will have a positive impact on the markets and boost confidence in the future of the Greek economy.
“Long-term sustainability, however, hinges crucially ... on the commitment of the Eurogroup to consider further debt relief measures in the event of an unexpectedly more adverse scenario,” it said.
The agreement on debt relief also envisages primary budget surpluses of 3.5 percent of GDP until 2022 and 2.2 percent from 2023 to 2060.
“No other country in the world, with the possible exception of oil producing countries, has ever achieved such large primary surpluses over such a protracted period of time,” the central bank said.
This assumption about budgetary savings was the greatest risk to the analysis of Greece’s long-term debt sustainability, it added.
The Bank of Greece stuck to its recommendation for a precautionary line of credit after the country exits its bailout program in August and maintained its 2.0 percent growth forecast for this year, picking up to 2.3 percent in 2019.
But it also cited uncertainties on the growth outlook, including delays in implementing reforms and privatizations and excessive taxation, “which could slow down the recovery of the economy”.
Given the agreed enhanced surveillance post-bailout, it said the ECB could use its discretion on keeping the waiver on sub-investment grade Greek bonds in place, so that they could be used as collateral in financing.
“The waiver, if kept in place, would lower the cost at which Greek banks receive financing from the ECB. At the same time, the participation of Greek government bonds in the ECB’s quantitative easing program would lower borrowing costs for the Greek government,” the Bank of Greece said.
Additional reporting by Michele Kambas and Renee Maltezou; Editing by Catherine Evans