Greek government debt service remains adequate in the medium term, according to the estimates of the Executive Board of the International Monetary Fund, which published on Monday the second report on the post-monetary surveillance of our country. However, it is nevertheless expressed the view that medium-term repayment capacity could be affected by certain pandemic-related factors.
As stated in the report, «Greece's public debt remains sustainable in the medium term with the increase in debt vulnerability caused by the pandemic largely mitigated by Greece's fairly large cash reserves and the funds of the European Recovery Fund, which will contribute to an adequate debt repayment capacity.».
In addition, it is noted that the pandemic put the brakes on the modest recovery of the Greek economy. However, it is acknowledged that the Greek government took timely restrictive measures, which helped to limit the spread in the initial stage of the epidemic. In fact, it is reported that the Greek GDP was reduced by 7.9% in the first half of 2020, when the average GDP loss in the Eurozone was 9% in the same period.
The report estimates a sharp contraction of the economy in 2020 followed by a gradual recovery, which is attributed:
- investments linked to privatisations
- on the first tranches of grants from the EU recovery programme
- the highest exports of goods
- the rise in private consumption
In terms of risks, the report focuses on the uncertainty created by the pandemic and how it will affect key sectors of economic activity. For example, the possibility of a prolonged pandemic negatively affecting the recovery of tourism is listed as a key risk.
For their part, the IMF Executive Directors endorsed the report's findings and expressed their approval of the way the Greek authorities handled the pandemic, noting that the Greek response was swift, large enough and appropriately targeted to help affected households and businesses. Moreover, they recommended continued targeted fiscal easing and good use of fiscal space, which can at the same time ensure medium-term debt sustainability.
In this context, they welcomed the expected support to come from the European Recovery Fund, noting that there must be an efficient use of these resources. In addition, the Executive Directors stressed the importance of targeted social support and of strengthening the implementation of public investment.
On debt, the executive directors were in line with the report, acknowledging that sustainability remains adequate in the medium term. They acknowledged, however, that there could be side effects should the worst-case pandemic scenarios be confirmed. In this light, they expressed the view that growth reforms combined with fiscal prudence and continued EU support would be key factors in ensuring long-term debt servicing.
Regarding the banking sector, the IMF Directors recommended a holistic approach to managing documented weaknesses, saying that the proper implementation of the new bankruptcy code will help facilitate restructuring. Finally, they assessed that there should be new solutions for distressed debtors that would replace the measures taken to contain the shocks created by the pandemic in banks.
