1

STRICTLY CONFIDENTIAL

DEBT SUSTAINABILITY ANALYSIS 11 March 2012 This note considers the sustainability of Greeces 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 the amount, and length, of financing committed to Greece by the IMF. Results show that the program can place Greek debt on a sustainable trajectory. Under a baseline 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, policy settings, and financing. These are modeled jointly under the program (e.g., with feedback from policies to the macroeconomy). Macroeconomic framework x GDP growth. Continued deep recession in 2012 is expected to give way to stabilization in 2013, followed by a mild cyclical recovery in 201417. Thereafter the economy tracks its estimated potential growth (2 percent per annum initially, falling to 1 percent in the late 2020s, as the 4 Real GDP growth impact of program structural reforms fade, 2 and demographic factors dominate). The path 0 has been adjusted compared to the final -2 review of the previous program to account for: (i) the worse-than-expected outturn -4 for 2011; (ii) the deterioration in the 201213 5th Review -6 outlook for Europe (and globally); and (iii) EFF Request -8 the revised package of structural reforms 2008 2009 2010 2011 2012 2013 2014 2015 2016 agreed, which will tend to deepen the contraction initially, but will pull forward the recovery (by improving unit labor costs, which through the other structural reforms assumed in the program, translates into increased price competitiveness and higher investment). Deflator and REER. Mild economy-wide deflation is expected in 201214, as labor market reform and high unemployment combine to generate significant declines in

wages and, with a lag, declines in prices. The pace of inflation thereafter gradually recovers 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 GDPdeflator based measures taking another half decade to correct. x External conditions. External demand by Greeces trading partners is expected to remain flat in 2012, 4 percentage points lower than under the WEO fall projections. A modest increase in Greeces trading partner demand is projected to start in 2013, although remaining on average 1 percent lower in the medium-term than previously projected. Cumulative import growth over the program period is expected to reach 6 percent. Regarding the terms of trade, these are forecast to worsen by 2 percentage points in 2012, reflecting commodity price movements and internal devaluation, before stabilizing.

Policy framework x Fiscal adjustment. The fiscal path generates a primary surplus of 4 percent of GDP in 2014. It steps down to 4 percent by 2021. The near-term adjustment path involves a primary deficit of 1 percent in 2012, followed by adjustment of 2 percent of GDP in both 2013 and 2014. The medium-term primary balance target is 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, although not without precedent. The incoming transfer committed by the euro area Member States in the Eurogroup decision of 21 February 20121, which were calculated based on the expected income of euro area national central banks (including the Bank of Greece), from their investment portfolio holdings of Greek government bonds are considered in the debt projections. However, for the sake of comparability and to ensure that these transfers will contribute to reduce the debt, the primary deficit/surplus targets are considered before these transfers.

Persistence of Large (Cyclically Adjusted) Primary Balances CAPB between 5 and 10 percent of GDP Number of countries total for 4 years Panama (1989-92); Canada (19972000); Italy (1997-00); Tunesia (1986-89); Austria (1976-79) 5 advanced countries 3

for 5-7 years Turkey (2000-06); Chile (2003-08); Jamaica (1983-88); New Zealand (1993-98); Barbados (1991-95); Denmark (1985-89) for 8-10 years Romania (1982-89); Egypt (1993-00) for 11-13 years for 14-15 years Mexico (19833-95); Israel (1983-94) Belgium (1990-04); Jamaica (199206); Bulgaria (1994-07)

2 2 3

0 0 1

Source: Strategies for Fiscal Consolidation in the Post-Crisis World (IMF, 2010)

Privatization. Privatization is projected to bring 45 billion over 201220, with fairly modest inflows during 2012-14 (12 billion). Receipts are projected to gradually increase with the resumption of growth and improvements in the perception of economic prospects, before settling at a rate averaging about 2 percent of GDP per year. The projectionsunchanged 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 50 billion (as in the February note, but above the 40 billion assumed in the autumn). The estimate reflects the results of the BlackRock diagnostic exercise, the impact of the PSI (including its likely accounting treatment), and refined estimates of resolution costs (as opposed to recapitalization costs). Recoveries, through the sale of bank equity, are conservatively estimated to amount to about 16 billion and included under privatization receipts. Central government balance sheet adjustments. A total amount of 7 billion in arrears is assumed to be cleared in 201213, representing the stock of arrears to suppliers 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.

Financing framework Private sector involvement. The assumptions about PSI reflect the offer made by Greece to its creditors on February 24, and the outcome as of March 9. The terms include: (i) a reduction in the nominal value of eligible Greek government bonds by 53.5 percent (15 percent paid up front with EFSF short-term notes acquired by Greece, with the remaining 31.5 percent exchanged into 30-year bonds amortizable after 10 years); (ii) coupons of 2 percent for payments in 201315, 3 percent in 201620, 3.65 in 2021, and 4.3 percent from 2022 onwards; (iii) a GDP-linked additional payment (capped at 1 percent of the notional amount of new bonds); and (iv) a co-financing structure with the EFSF concerning the 15 percent upfront payment. The pool of eligible debt issued or guaranteed by the Greek government for the debt exchange amounts to 206 billion, and includes Greek and foreign law government bonds as well as SOE debt guaranteed by the Hellenic Republic. In line with the results released by the authorities on March 9th, and their decision to activate CACs, the creditor participation rate is assumed to be 95.7 percent on this base.1 Official sector involvement. The assumptions about OSI reflect the agreement reached at the Eurogroup meeting on February 21, 2012: (i) a reduction in the margin of the Greek Loan Facility (GLF) to a uniform 150 basis points (gain of 2.8 percent of GDP through 2020, and reduction in financing needs of 1.4 billion until end-2014); (ii) Greece to receive, until 2020, an amount which has been calculated based on the expected income accruing on Greek bonds held by national central banks in their investment portfolio (in an amount sufficient to reduce debt-to-GDP in 2020 by 1.8 percentage points and to lower financing needs until end-2014 by approximately 1.8 billion). Official financing. Funding from euro area member states is assumed to be provided by the EFSF at cost, with loans amortized over a 25-year period (with 10 years grace), and interest paid annually. IMF lending is calibrated to be on EFF terms.2 Market access. It is assumed that, post-program, potential access to markets would initially be at short maturities and still high interest rates, due to high debt, a senior debt overhang, and the need for Greece to establish a considerable track record. This would initially discourage large issuances and imply continued reliance on official
1

The final impact on the Greek public debt of the debt exchange concerning foreign-law bonds will only be known in a few weeks. The debt projections assume that no bondholders included in the debt exchange will be compensated ex post.
2

http://www.imf.org/external/np/exr/facts/eff.htm

financing, as committed by Euro area member states on standard EFSF borrowing terms, provided Greece successfully implements its program. For purpose of this DSA, therefore, recourse to private market financing is conservatively assumed to start at short maturities and in light volumes and gradually increase during the postprogram period. B. Public Sector DSA Baseline projections indicate that debt ratio would fall to 116 percent of GDP in 2020 (Table 1). This is a significant improvement over levels projected without PSI in the summer and autumn 2011 (130 and 170 156 percent of GDP respectively). In General government debt (in percent of GDP) terms of trajectory, the PSI deal helps to 160 initially reduce debt, but debt then 150 spikes up again to 164 percent of GDP 140 in 2013 due to the shrinking economy 130 and incomplete fiscal adjustment. Once 120 the fiscal adjustment is complete, 110 growth has been restored, and 100 privatization receipts are accruing, Baseline steady reductions on the debt ratio 90 commence. Greece would have to 80 2006 2012 2018 2024 2030 maintain good policies through 2030 to reduce the ratio below 100 percent of GDP. Stress tests point to a number of sensitivities, with the balance of risks mostly tilted to the downside: x Policies. If the primary balance gets stuck below 1 percent of GDP (a level it will only marginally exceed in 2013), then debt would be on an ever-increasing trajectory. Significant shortfalls in privatization proceeds (only 10 billion of 45 billion realized by 2020), would raise the level of debt appreciably, and slow its projected decline, leaving it at 130 percent of GDP by 2020.

180

180
General government debt (in percent of GDP) 160

General government debt (in percent of GDP)

160

140

140

120

100

80 2006

Baseline PB at 3.5% of GDP PB at 3% of GDP PB at 2.5% of GDP PB at 2.2% of GDP PB at 1.5% of GDP 2012 2018 2024 2030

120

100 Baseline Lower privatization 80 2006 2012 2018 2024 2030

Macro parameters. Debt outcomes are very sensitive to growth or variations in the speed of internal devaluation. Fixing the primary balance, nominal growth permanently lower by 1 percent per annum would send debt-to-GDP to 129 percent by 2020. Nominal growth permanently higher by 1 percent per annum would allow debt to fall to 105 percent of GDP by 2020. Interest rate sensitivities arise via the rate charged on official financing. (since Greece is out of the market for most of the decade under the assumed borrowing rule). If the spread on EFSF borrowing were to be 100 bps higher, then debt-to-GDP would reach 121 percent by 2020.

180
160 140

180

General government debt (in percent of GDP) 160

General government debt (in percent of GDP)

140 120 120 100 80 60 2006 2012 2018 2024 2030 Baseline Lower growth Higher growth 100 Baseline Higher Bund rate (+100 bps) 80 2006 2012 2018 2024 2030

A combined stress test on the pace of policy implementation and macro adjustment is also of interest. The Greek authorities may not be able to implement reforms at the pace envisioned in the baseline. Greater wage flexibility may in practice be resisted by economic agents; product and service market liberalization may continue to be plagued by strong opposition from vested interests; and business environment reforms may also remain bogged down in bureaucratic delays. On the policy side, it may take Greece much more time than assumed to identify and implement the necessary structural fiscal reforms to improve 6

the primary balance from -1 percent in 2012 to 4 percent of GDP, and concerning assets sales, delays may arise due to market-related constraints, encumbrances on assets, or political hurdles. And of course a less favorable macro outcome would itself further hurt policy implementation prospects. A tailored scenario can be modeled on the basis of several assumptions. Specifically, a failure to reinvigorate structural reforms is assumed to hold up the recovery, forcing higher unemployment and deeper recession to secure internal devaluation over a longer period. At the same time, it is assumed that this, and difficulties in identifying reforms, delay the completion of fiscal adjustment by three full years. Finally, it is assumed that privatization plans take an additional four years to complete (with proceeds through 2020 reduced by 20 billion). Prospects for a return to the market would become even less certain. For illustrative purposes, the additional financing requirements in this scenario are assumed to be covered by the official sector on EFSF terms.
180 170 160 150 140 130 120 110 100 90 General government debt (in percent of GDP)

Baseline
Tailored downside scenario 2006 2012 2018 2024 2030

80

The debt trajectory is extremely sensitive to program delays, suggesting that the program could be accident prone, where sustainability could come into question (Table 2). Under the tailored scenario, the debt ratio would peak at 170 percent of GDP in 2014. Once growth did recover, fiscal policy achieved its target, and privatization picked up, the debt would begin to slowly decline. Debt to GDP would fall to around 145.5 percent of GDP by 2020. Under the assumption that stronger growth could follow on the eventual elimination of the competiveness gap, the debt ratio would slowly converge to that in the baseline, but likely only in the late 2020s. With debt ratios so high in the next decade, smaller shocks could produce unsustainable dynamics.

Greece: Baseline vs. Tailored Downside: Key Macro and Policy Assumptions
Real GDP Growth (percent) 8.0 6.0 4.0 2012 2014 2016 2018 2020 2.0 0.0 Baseline -2.0 Tailored downside -4.0 -6.0 Primary Surplus and Privatization Proceeds (percent of GDP)

4 3 2 1 0 -1 2010 -2 -3 -4 -5 -6 -7 -8

2010

2012

2014

2016

2018

2020

Baseline privatization proceeds Tailored downside privatization proceeds Baseline primary surplus Tailored downside primary surplus

Table A1. Greece: Debt Sustainability Baseline, 2007-2030 (in percent of GDP, unless otherwise indicated)
2007 2008 Actual 2009 2010 2011 2012 2013 2014 2015 2018 2019 2020 Projections 2016 2017 2030

Baseline: Public sector debt 1/ o/w foreign-currency denominated 100.6 0.0 7.1 1.0 2.0 40.8 42.8 -1.0 -1.0 1.6 -2.7 0.0 0.0 0.0 0.0 0.0 6.2 246.6 6.8 20.8 159.7 159.7 9.9 33.9 15.8 50.9 19.4 57.5 26.6 73.6 33.9 88.1 11.5 29.7 164.8 166.8 252.6 297.9 332.8 403.1 378.4 388.3 382.0 14.6 38.4 169.6 169.0 382.0 10.4 28.4 172.3 166.8 362.5 5.9 16.6 174.6 164.5 343.1 5.5 16.2 177.0 162.1 325.4 4.1 12.7 180.0 160.2 2.1 6.5 4.8 40.7 45.5 0.7 0.7 0.6 0.1 0.0 1.0 0.0 1.0 0.0 -4.4 10.5 18.3 10.6 38.0 48.7 5.7 5.7 2.3 3.4 0.0 1.9 0.0 0.3 1.6 -7.8 18.2 16.6 5.0 39.5 44.4 8.0 8.0 3.9 4.0 0.0 3.7 0.0 1.0 2.6 1.6 33.9 18.1 2.4 41.0 43.4 14.3 14.3 4.8 9.4 0.0 1.5 -0.5 2.1 -0.1 15.7 -5.6 40.2 1.0 42.2 43.2 15.1 15.1 6.8 8.3 ... 24.1 -1.6 25.8 -0.1 -45.7 4.3 4.0 -1.8 42.2 40.4 6.2 6.2 6.3 -0.1 ... -0.4 -2.1 1.5 0.2 0.3 -3.3 -3.3 -4.5 42.1 37.6 1.7 1.7 5.8 -4.1 ... -0.5 -2.1 0.0 1.6 0.0 -7.7 -7.7 -4.5 40.1 35.6 -0.6 -0.6 4.2 -4.9 ... -2.6 -2.6 0.0 0.0 0.0 -7.8 -7.8 -4.5 40.1 35.6 -0.4 -0.4 4.0 -4.5 ... -2.8 -2.6 0.0 -0.2 0.0 -7.8 -7.8 -4.5 40.1 35.6 -0.5 -0.5 3.4 -4.0 ... -2.8 -2.6 0.0 -0.2 0.0 -7.1 -7.1 -4.3 40.1 35.8 -0.6 -0.6 2.9 -3.5 ... -2.2 -2.1 0.0 -0.1 0.0 -7.1 -7.1 -4.3 40.1 35.8 -0.7 -0.7 2.5 -3.2 ... -2.2 -2.1 0.0 -0.1 0.0 307.8 5.8 18.7 183.0 158.2 102.8 0.0 113.2 0.0 131.4 0.0 165.3 0.0

159.7 0.0

164.0 0.0

160.7 0.0

153.0 0.0

145.2 0.0

137.4 0.0

130.3 0.0

123.3 0.0

116.5 0.0 -6.8 -6.8 -4.3 40.1 35.8 -0.4 -0.4 2.3 -2.7 ... -2.1 -2.1 0.0 -0.1 0.0 290.8 5.5 18.5 186.1 156.6

88.0 0.0 -2.0 -2.0 -3.5 40.1 36.6 1.5 1.5 2.7 -1.2 ... 0.0 0.0 0.0 0.0 0.0 219.7 9.8 46.5 242.8 183.3

Change in public sector debt Identified debt-creating flows (4+7+12) Primary deficit Revenue and grants Primary (noninterest) expenditure Automatic debt dynamics 2/ Contribution from interest rate/growth differential 3/ Of which contribution from real interest rate Of which contribution from real GDP growth Contribution from exchange rate depreciation 4/ Other identified debt-creating flows Privatization receipts (negative) Recognition of implicit or contingent liabilities Other (specify, e.g. bank recapitalization) Residual, including asset changes (2-3) 5/

Public sector debt-to-revenue ratio 1/

Gross financing need 6/ in billions of U.S. dollars

Scenario with key variables at their historical averages 7/ Scenario with no policy change (constant primary balance) in 2012-2017

Key Macroeconomic and Fiscal Assumptions Underlying Baseline 3.0 5.5 2.0 10.3 3.5 8.9 2.0 -0.1 5.3 0.6 -6.6 4.7 6.0 4.8 -3.3 5.0 2.2 7.2 2.8 3.6 10.6 -3.5 5.0 3.3 -11.8 1.7 -11.9 5.0 -6.8 5.0 3.4 -0.5 1.6 -9.0 2.4 -4.8 3.3 3.9 ... -0.7 -5.1 1.0 0.0 3.4 3.9 ... -0.5 -6.4 -1.8 2.5 3.5 3.6 ... -0.1 -4.7 -4.5 3.1 3.6 2.8 ... 0.8 -2.4 -4.5 3.0 3.8 2.8 ... 1.0 3.0 -4.5 2.8 3.9 2.5 ... 1.3 2.8 -4.5 2.6 3.9 2.2 ... 1.6 3.4 -4.3 2.5 3.9 2.1 ... 1.8 2.5 -4.3 2.2 3.8 1.9 ... 1.9 2.2 -4.3 1.4 5.0 3.2 ... 1.9 1.4 -3.5

Real GDP growth (in percent) Average nominal interest rate on public debt (in percent) 8/ Average real interest rate (nominal rate minus change in GDP deflator, in percent) Nominal appreciation (increase in US dollar value of local currency, in percent) Inflation rate (GDP deflator, in percent) Growth of real primary spending (deflated by GDP deflator, in percent) Primary deficit

1/ General government gross debt. 2/ Derived as [(r - S(1+g - g + DH(1+r]/(1+g+S+gS)) times previous period debt ratio, with r = interest rate; S = growth rate of GDP deflator; g = real GDP growth rate; D = share of foreign-currency denominated debt; and H = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar). 3/ The real interest rate contribution is derived from the denominator in footnote 2/ as r - (1+g) and the real growth contribution as -g. 4/ The exchange rate contribution is derived from the numerator in footnote 2/ as DH(1+r). 5/ For projections, this line includes exchange rate changes. 6/ Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period. 7/ The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP. 8/ Derived as nominal interest expenditure divided by previous period debt stock. 9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Table A2. Greece: Debt Sustainability in Alternative Scenario, 2007-2030 (in percent of GDP, unless otherwise indicated)
2007 2008 Actual 2009 2010 2011 2012 2013 2014 2015 2018 2019 2020 Projections 2016 2017 2030

Baseline: Public sector debt 1/ o/w foreign-currency denominated 100.6 0.0 7.1 1.0 2.0 40.8 42.8 -1.0 -1.0 1.6 -2.7 0.0 0.0 0.0 0.0 0.0 6.2 246.6 6.8 20.8 159.3 159.3 9.9 33.9 15.8 50.9 19.4 57.5 26.6 73.6 12.4 32.5 6.3 16.2 165.5 168.0 252.6 297.9 332.8 403.1 381.1 399.1 406.2 19.0 49.8 171.4 172.9 418.2 13.9 37.2 175.1 174.3 411.9 8.5 23.2 178.6 175.3 399.2 6.3 17.7 182.1 175.7 386.3 4.7 13.8 186.1 176.0 2.1 6.5 4.8 40.7 45.5 0.7 0.7 0.6 0.1 0.0 1.0 0.0 1.0 0.0 -4.4 10.5 18.3 10.6 38.0 48.7 5.7 5.7 2.3 3.4 0.0 1.9 0.0 0.3 1.6 -7.8 18.2 16.6 5.0 39.5 44.4 8.0 8.0 3.9 4.0 0.0 3.7 0.0 1.0 2.6 1.6 33.9 18.1 2.4 41.0 43.4 14.3 14.3 4.8 9.4 0.0 1.5 -0.5 2.1 -0.1 15.7 -5.9 39.4 1.0 41.8 42.8 13.4 13.4 4.4 9.1 ... 24.9 -0.5 25.5 -0.1 -45.3 8.1 7.8 0.5 42.0 42.5 6.7 6.7 5.1 1.6 ... 0.7 -1.0 1.5 0.2 0.3 3.9 3.9 0.0 42.2 42.2 3.3 3.3 5.9 -2.6 ... 0.6 -1.0 0.0 1.6 0.0 -0.9 -0.9 -1.3 40.8 39.5 2.0 2.0 5.6 -3.6 ... -1.6 -1.6 0.0 0.0 0.0 -2.6 -2.6 -2.5 40.8 38.3 1.8 1.8 5.6 -3.7 ... -1.9 -1.7 0.0 -0.2 0.0 -5.2 -5.2 -4.5 40.8 36.3 1.2 1.2 4.9 -3.7 ... -1.9 -1.7 0.0 -0.2 0.0 -5.3 -5.3 -4.5 40.8 36.3 0.6 0.6 4.1 -3.5 ... -1.4 -1.2 0.0 -0.1 0.0 -5.9 -5.9 -4.5 40.8 36.3 0.0 0.0 3.6 -3.6 ... -1.4 -1.3 0.0 -0.1 0.0 371.9 6.6 20.1 190.2 175.6 102.8 0.0 113.2 0.0 131.4 0.0 165.3 0.0

159.3 0.0

167.5 0.0

171.4 0.0

170.6 0.0

168.0 0.0

162.8 0.0

157.5 0.0

151.7 0.0

145.7 0.0 -6.0 -6.0 -4.3 40.8 36.5 -0.3 -0.3 2.9 -3.3 ... -1.4 -1.3 0.0 -0.1 0.0 357.3 6.6 20.9 194.2 174.8

110.0 0.0 -1.6 -1.8 -3.5 40.8 37.3 1.7 1.7 3.2 -1.5 ... 0.0 0.0 0.0 0.0 0.2 269.7 12.6 57.0 246.3 195.3

Change in public sector debt Identified debt-creating flows (4+7+12) Primary deficit Revenue and grants Primary (noninterest) expenditure Automatic debt dynamics 2/ Contribution from interest rate/growth differential 3/ Of which contribution from real interest rate Of which contribution from real GDP growth Contribution from exchange rate depreciation 4/ Other identified debt-creating flows Privatization receipts (negative) Recognition of implicit or contingent liabilities Other (specify, e.g. bank recapitalization) Residual, including asset changes (2-3) 5/

Public sector debt-to-revenue ratio 1/

Gross financing need 6/ in billions of U.S. dollars

Scenario with key variables at their historical averages 7/ Scenario with no policy change (constant primary balance) in 2012-2017

Key Macroeconomic and Fiscal Assumptions Underlying Baseline 3.0 5.5 2.0 10.3 3.5 8.9 2.0 -0.1 5.3 0.6 -6.6 4.7 6.0 4.8 -3.3 5.0 2.2 7.2 2.8 3.6 10.6 -3.5 5.0 3.3 -11.8 1.7 -11.9 5.0 -6.8 5.0 3.4 -0.5 1.6 -9.0 2.4 -5.2 3.3 2.5 ... 0.8 -6.5 1.0 -1.0 3.5 3.2 ... 0.3 -1.8 0.5 1.6 3.6 3.6 ... 0.0 0.9 0.0 2.2 3.6 3.3 ... 0.3 -4.3 -1.3 2.3 3.9 3.4 ... 0.5 -1.0 -2.5 2.3 3.8 3.0 ... 0.8 -3.1 -4.5 2.3 3.9 2.7 ... 1.2 2.3 -4.5 2.4 3.9 2.4 ... 1.5 2.4 -4.5 2.3 3.9 2.1 ... 1.8 3.0 -4.2 1.4 4.9 3.0 ... 1.9 2.8 -3.5

Real GDP growth (in percent) Average nominal interest rate on public debt (in percent) 8/ Average real interest rate (nominal rate minus change in GDP deflator, in percent) Nominal appreciation (increase in US dollar value of local currency, in percent) Inflation rate (GDP deflator, in percent) Growth of real primary spending (deflated by GDP deflator, in percent) Primary deficit

1/ General government gross debt. 2/ Derived as [(r - S(1+g - g + DH(1+r]/(1+g+S+gS)) times previous period debt ratio, with r = interest rate; S = growth rate of GDP deflator; g = real GDP growth rate; D = share of foreign-currency denominated debt; and H = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar). 3/ The real interest rate contribution is derived from the denominator in footnote 2/ as r - (1+g) and the real growth contribution as -g. 4/ The exchange rate contribution is derived from the numerator in footnote 2/ as DH(1+r). 5/ For projections, this line includes exchange rate changes. 6/ Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period. 7/ The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP. 8/ Derived as nominal interest expenditure divided by previous period debt stock. 9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

10

11

STRICTLY CONFIDENTIAL