The European Union's rescue deal for Greece will only slightly reduce the country's debt and it will take a generation to cut it down to more sustainable levels, the OECD said today.
"Initial analysis suggests that the (EU) package would decrease the debt burden only slightly," the OECD said in a report on Greece, commenting on the rescue deal agreed by the EU last month, based on new and cheaper loans and bond swaps.
"The additional official financial support agreed and the maturity extensions, both public and private, provide the time needed for Greece to continue to implement fundamental fiscal and structural reforms, and for those reforms to bear fruit," the report said.
Reducing Greece's funding needs is different from cutting its debt mountain to levels that the markets will consider safe and sustainable over the long term.
The Organisation for Economic Cooperation and Development sees Greek debt dropping to 100 per cent of GDP in 2035 from about 140 per cent in 2010 under its baseline scenario, in which the debt-choked country would widely miss an EU/IMF target to raise €50 billion from privatisations by 2015.
Under a more optimistic scenario where Greece meets its privatisation target with only a slight delay, the country's debt would shrink to 60 per cent of GDP by 2035 - the ceiling set by EU treaties - the report says.
"We came here to give a vote of confidence but we are also here to say we will support the Greek government for a full generation, which is what it is going to take to get to those numbers of lower debt-to-GDP (ratio)," Angel Gurria, head of the OECD club of industrialised nations, told Reuters in an interview today.
Many private analysts think that at the very least, the debt/GDP ratio needs to be cut below 100 per cent, and some suggest 80 per cent.
"The baseline scenario may not be your more desirable scenario," Mr Gurria said, adding that Greece is capable of doing better on privatisations and structural changes. "It is doable, it is possible," he said.
In its report, the OECD said Greece had made substantial progress on reforms but urgently needed to improve tax collection. It also criticised Athens for not doing enough to open up closed professions and the job market.
"Despite the impressive record on structural reform, the government has backtracked on reforms related to wage agreements at firm level, the full opening up of the professions of lawyers and pharmacists, and has hesitated on the privatisation programme," the report says.
It adds that the Greek banking sector is in a difficult situation because of exposure to government debt and says banks will continue to be reliant on ECB funding.
"Attempts to reduce banks' dependence on ECB liquidity thus need to be approached with caution, as they could trigger a liquidity crunch," the report says, adding that further consolidation could be an option to increase access to liquidity.
"The managers and shareholders should, however, explore the option of partnerships or mergers with foreign banks, while the authorities should refrain from imposing protectionist impediments," it said.
Reuters
