By Gabriele Steinhauser

When euro zone governments decided to throw Greece another financial lifeline this summer, they also embraced a new way of assessing whether the country will ever be able to repay its debts. But that framework isn’t so flattering for three other highly indebted euro countries.

Italy, Portugal and Spain all have gross financing needs—the money a country has to raise to cover its deficit and roll over maturing debt—above 15% of gross domestic product in the coming years. That’s the maximum level the International Monetary Fund said is manageable for Greece in its preliminary debt-sustainability analysis released this summer. By contrast, Cyprus and Ireland, two other euro countries that were bailed out in recent years, remain below the 15% threshold.

Gross financing needs as a percentage of GDP

   

Gross financing needs as a percentage of GDP

  2015 2016 2017 2018 2019 2020
Greece * 24.5 19 15.7 12.8 14.1 11.3
Italy 19.8 16.5 18.6 16.1 14.7 14.5
Portugal 22.4 19.6 14.9 16.9 18.3 22.3
Spain 18.9 17.3 17.4 16.9 16.3 16.2
Cyprus 12.8 6.1 3.6 4.9 12.2 10.7
Ireland 10.5 8.5 6.8 7.4 10.2 13

(Source: IMF)

 

The question of when a country’s debt can be considered sustainable has been central to bailout discussions between the eurozone and the IMF for years. And the answer has been changing regularly—especially in the case of Greece.

In the spring of 2012, the International Monetary Fund signed off on a second multibillion bailout, only after a steep write down on its government bonds promised to bring Greek debt below 120% of gross domestic product by 2020. That, the IMF said at the time, was necessary to make the country’s debt “sustainable in the medium term.”

It didn’t take long for that prediction to become outdated. By November 2012 it became clear that the 120% by 2020 was now out of reach. To keep the IMF on board, euro zone governments promised to ensure Greece’s debt would be “substantially lower than 110%” of gross domestic product by 2022.

Fast forward to 2015 and months of back and forth, between Greece’s left-wing anti-austerity government and the rest of the eurozone.

By the end of June, the IMF was once again ringing the alarm bells over Greek debt. The bigger deficits, lower growth and fewer privatizations expected under the Syriza-led government “render the debt dynamics unsustainable,” the fund warned. In its analysis released in on July 2, three days before Greeks overwhelmingly voted “no” in a referendum on a new bailout deal, the IMF said that Greece’s debt was going to remain at 149.9% in 2020.

Even if debt sustainability was going to be judged by gross financing needs rather than the debt-to-GDP ratio, it was still unlikely that Athens would ever be able to regain its financial independence without substantial debt relief, the IMF warned. It was in this report that the IMF first official mentioned 15% as the adequate threshold for determining Greece’s debt sustainability.

Gross government debt as a percentage of GDP

        

Gross government debt as a percentage of GDP

  2015 2016 2017 2018 2019 2020
Greece * 176.7 176.2 169.7 162.3 155.8 149.9
Greece + 196.3 200.9 198.6 190.7 182.3 174.5
Italy 133.3 132.1 130.5 128.4 125.8 122.9
Portugal 127.1 124.4 122 120.4 119.4 118.6
Spain 98.5 98.5 98.1 97 95.6 93.9
Cyprus 106.4 98.4 93.2 87.3 82.4 77.8
Ireland 109 107 104.1 99.9 96.2 92.5

(Source: IMF, European Commission)

By switching its focus from Greece’s debt-to-GDP ratio to gross financing needs, the IMF followed demands from European institutions, which had been arguing that the long maturities and low interest rates of the country’s bailout loans made its debt burden much less cumbersome than that of states relying on funding from financial markets. Crucially, the focus on financing needs will make it easier for eurozone governments to address Greece’s debt problem without cutting the nominal value of their loans to Athens. Gross financing needs can be reduced by giving a country more time to repay loans, even as its debt-to-GDP ratio stays the same.

European and IMF officials say that emphasizing gross financing needs for Greece doesn’t mean they are the best way of assessing the debt sustainability of other eurozone countries. In contrast to Greece, where the majority of the debt will remain in the hands of other eurozone governments for a long time, Spain, Italy and Portugal are much more dependent on financial markets.

That means that IMF’s regular framework for assessing debt sustainability—which in addition to gross financing needs also includes the debt-to-GDP ratio and the maturity and currency profile of a country’s debt—remains valid for them, according to these officials.

*IMF preliminary debt-sustainability analysis dated June 26

+European Commission, ECB debt-sustainability analysis dated July 10

source "The Wall Street Journal"