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11 March 2012
This note considers the sustainability of Greece’s public debt. It updates the note of 
 February 2012, taking into account the Eurogroup decisions of 21 February 2012 on OSI and the outcome of the debt exchange exercise of March 2012. As in the February note, it takes into the account the euro area decisions on official financing, and also considers theamount, and length, of financing committed to Greece by the IMF. Results show that the program can place Greek debt on a sustainable trajectory. Under abaseline scenario, the debt ratio would decline to below 117 percent of GDP in 2020, and would keep declining to below 90 percent in 2030. However, there are significant risks that debt declines may be interrupted or even reversed by shocks. Under an alternative, less favorable scenario, the debt ratio in 2020 would still be above 145 percent of GDP.Moreover, given the high prospective level and share of senior debt, the prospects for Greece to be able to return to the market at the end of the program are uncertain.
A. Key inputs for the DSA
Three sets of inputs underpin the DSA.
These relate to the macroeconomy, policysettings, and financing. These are modeled jointly under the program (e.g., with feedback from policies to the macroeconomy).
Macroeconomic framework 
GDP growth.
Continued deep recession in 2012 is expected to give way tostabilization in 2013, followed by a mild cyclical recovery in 2014
17. Thereafter the economy tracks its estimated potential growth (2½ percent per annum initially,falling to 1½ percent in the late 2020s, as theimpact of program structural reforms fade,and demographic factors dominate). The pathhas been adjusted compared to the finalreview of the previous program to accountfor: (i) the worse-than-expected outturnfor 2011; (ii) the deterioration in the 2012
13outlook for Europe (and globally); and (iii)the revised package of structural reformsagreed, which will tend to deepen thecontraction initially, but will pull forward the recovery (by improving unit labor costs, which through the other structural reforms assumed in the program, translatesinto increased price competitiveness and higher investment).
Deflator and REER.
Mild economy-wide deflation is expected in 2012
14, as labor market reform and high unemployment combine to generate significant declines in
Real GDP growth
5th ReviewEFF Request
2wages and, with a lag, declines in prices. The pace of inflation thereafter graduallyrecovers to reach the euro area average by 2019. Measured in unit labor cost terms,the real effective exchange rate overvaluation largely disappears by 2015, with GDP-deflator based measures taking another half decade to correct.
External conditions.
al demand by Greece’s trading partners is expected to
remain flat in 2012, 4½ percentage points lower than under the WEO fall projections
. A modest increase in Greece’s trading partner demand is projected to
start in 2013, although remaining on average 1 percent lower in the medium-termthan previously projected. Cumulative import growth over the program period isexpected to reach 6½ percent. Regarding the terms of trade, these are forecast toworsen by 2½ percentage points in 2012, reflecting commodity price movementsand internal devaluation, before stabilizing.
Policy framework 
Fiscal adjustment
. The fiscal path generates a primary surplus of 4½ percent of GDP in 2014. It steps down to 4 percent by 2021. The near-term adjustment pathinvolves a primary deficit of 1 percent in 2012, followed by adjustment of 2¾ percent of GDP in both 2013 and 2014. The medium-term primary balance targetis unchanged versus the previous note on debt sustainability, although the near-term path is slightly more accommodative. The path remains ambitious in the context of  previous fiscal performance in Greece and in international comparisons, althoughnot without precedent. The incoming transfer committed by the euro area Member States in the Eurogroup decision of 21 February 20121, which were calculated basedon the expected income of euro area national central banks (including the Bank of Greece), from their investment portfolio holdings of Greek government bonds areconsidered in the debt projections. However, for the sake of comparability and toensure that these transfers will contribute to reduce the debt, the primarydeficit/surplus targets are considered before these transfers.
is projected to bring €4
5 billion over 2012
20, withfairly modest inflows during 2012-14
billion). Receipts are projected togradually increase with the resumption of growth and improvements in the perception of economic prospects, before settling at a rate averaging about 2 percentof GDP per year. The projections
unchanged from the previous debt assessments
remain ambitious, but not unprecedented in international context.
Financial system support.
The cost of financial system support is estimated at
billion (
as in the February note, but above the €40
billion assumed in theautumn). The estimate reflects the results of the BlackRock diagnostic exercise, theimpact of the PSI (including its likely accounting treatment), and refined estimatesof resolution costs (as opposed to recapitalization costs). Recoveries, through the
sale of bank equity, are conservatively estimated to amount to about €16
billion andincluded under privatization receipts.
Central government balance sheet adjustments.
A total
amount of €7
billion inarrears is assumed to be cleared in 2012
13, representing the stock of arrears tosuppliers outstanding at end-2011, and a buffer for clearance of any arrears that may be identified as 2011 fiscal results are finalized. This assumption is unchanged.. The
financing framework also builds a deposit buffer of €5
billion (on top of the existing
3 billion buffer) by end-2014. This is to address risks from unexpected revenue,spending or debt service developments, or to reduce Greece's financing needs in the post-program period if the buffer remains intact.
CAPB between 5 and 10 percent of GDPtotaladvancedcountriesfor 4 yearsPanama (1989-92); Canada (1997-2000); Italy (1997-00); Tunesia(1986-89); Austria (1976-79)53for 5-7 yearsTurkey (2000-06); Chile (2003-08);Jamaica (1983-88); New Zealand(1993-98); Barbados (1991-95);Denmark (1985-89)62for 8-10 yearsRomania (1982-89); Egypt (1993-00)20for 11-13 yearsMexico (19833-95); Israel (1983-94)20for 14-15 yearsBelgium (1990-04); Jamaica (1992-06); Bulgaria (1994-07)31Source: Strategies for Fiscal Consolidation in the Post-Crisis World (IMF, 2010)Number of countriesPersistence of Large (Cyclically Adjusted) Primary Balances

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