ECB forecasts Greek debt will peak at 161 per cent of GDP

The European Central Bank estimated yesterday that Greece’s public debt would peak at 161 per cent of gross domestic product in 2012.

Athens’ debt should then decline to 127 per cent of GDP by 2020, the ECB said in its monthly bulletin for July.

“Achieving this downward trajectory crucially hinges on the government’s willingness and ability to persevere with fiscal consolidation and implement the structural reform and privatisation programmes in full,” the bank said. A study of the sustainablility of Greece’s debt, currently at around €350 billion, concluded that “debt dynamics largely depend on factors that are under the control of the Greek government.”

Athens is in talks with the European Union and the International Monetary Fund on a second financial rescue package worth approximately the same as one established last year, or €110 billion.

Greece is not able to currently borrow money on private equity markets at rates it can afford, and must thus seek funds from the EU and IMF.

Greek Prime Minister Georges Papandreou warned yesterday in a German press interview that if such financial aid did not come quickly, economic reforms in the country would fail.

Meanwhile, the ECB presented several scenarios for the trajectory of Greece’s debt based on how much of a primary budget surplus Athens would be able to attain in the coming years.

A primary budget balance excludes the cost of servicing a country’s debt.

The central bank assumed that by 2015, Greece would be able to run a primary budget surplus of around 6.5 per cent of GDP. It noted that “while this requires considerable fiscal discipline, other EU countries were able in the past to sustain primary surpluses of a similar size over several years.”

Should that not be the case, Greece’s finances would remain under pressure, the ECB warned.

It said a surplus of 3.5 per cent would allow Greece to stabilise its public debt at around 150 per cent of GDP, but added: “The Greek government cannot be expected to regain market access if the debt ratio is merely stabilised at this high level.”