Greek debt nightmare laid bare

Surrender of Greek sovereignty?

    Just Watched

    Surrender of Greek sovereignty?

Surrender of Greek sovereignty? 05:09

Story highlights

  • A 'confidential' report reveals Athens' rescue programme is way off track
  • Suggests need another bail-out once a second rescue runs out.
  • A 10-page debt sustainability analysis was obtained by the Financial Times Monday
  • Athens risks a recession so deep that Greece will not be able to climb out of the debt hole

A "strictly confidential" report on Greece's debt projections prepared for eurozone finance ministers reveals Athens' rescue programme is way off track and suggests the Greek government may need another bail-out once a second rescue -- set to be agreed on Monday night -- runs out.

The 10-page debt sustainability analysis, distributed to eurozone officials last week but obtained by the Financial Times on Monday night, found that even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of a new three-year, €170bn bail-out.

It warned that two of the new bail-out's main principles might be self-defeating. Forcing austerity on Greece could cause debt levels to rise by severely weakening the economy while its €200bn debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors.

"Prolonged financial support on appropriate terms by the official sector may be necessary," the report said.

The report made clear why the fight over the new Greek bail-out has been so intense. A German-led group of creditor countries -- including the Netherlands and Finland -- has expressed extreme reluctance to go through with the deal since they received the report.

A "tailored downside scenario" in the report suggests Greek debt could fall far more slowly than hoped, to only 160 per cent of economic output by 2020 -- well below the target of 120 per cent set by the International Monetary Fund. Under such a scenario, Greece would need about €245bn in bail-out aid, far more than the €170bn under the "baseline" projections eurozone ministers were using in all-night negotiations in Brussels on Monday.

Ideas for rebuilding Greece

    Just Watched

    Ideas for rebuilding Greece

Ideas for rebuilding Greece 02:55
PLAY VIDEO
'Not the right agreement' for Greece

    Just Watched

    'Not the right agreement' for Greece

'Not the right agreement' for Greece 03:10
PLAY VIDEO
Borg: More steps needed on bailout deal

    Just Watched

    Borg: More steps needed on bailout deal

Borg: More steps needed on bailout deal 04:00
PLAY VIDEO
Doing business in cash-strapped Greece

    Just Watched

    Doing business in cash-strapped Greece

Doing business in cash-strapped Greece 03:56
PLAY VIDEO

"The Greek authorities may not be able to deliver structural reforms and policy adjustments at the pace envisioned in the baseline," the pessimistic scenario warned. "Greater wage flexibility may in practice be resisted by economic agents; product and service market liberalisation may continue to be plagued by strong opposition from vested interests; and business environment reforms may also remain bogged down in bureaucratic delays."

Even under a more favourable scenario, Greece could need an additional €50bn by the end of the decade on top of the €136bn in new funds until 2014 being debated by finance ministers on Monday night. That "baseline" scenario includes projections that the Greek economy stops shrinking next year and returns to 2.3 per cent growth in 2014.

Details of what has gone off course in the report are long and daunting. A recapitalisation of Greek banks, originally projected to cost €30bn, will now cost €50bn. A Greek privatisation plan, originally to raise €50bn, will now be delayed by five years and bring in only €30bn by 2020.

The report also paints a troubling outlook for the debt restructuring, expected to begin this week. The deal involves a debt swap, where private investors trade in existing Greek bonds for a package that includes €30bn in bonds issued by the eurozone's rescue fund and €70bn in new, long-term Greek bonds.

The analysis says the swap, co-financed by Greece and the rescue fund, essentially creates a class of privileged investors who will chase off new bond investors when Greece attempts to return to the bond market.

"It is now uncertain whether market access can be restored in the immediate post-programme years," the report warned.

      Markets in crisis

    • German Chancellor Angela Merkel talks with Finance Minister Wolfgang Schaeuble during a session at the Bundestag (lower house of parliament) on June 25, 2013 in Berlin.

      German Finance Minister Wolfgang Schaeuble says the eurozone's problems are not solved, but "we are in a much better shape than we used to be some years ago."
    • IBIZA, SPAIN - AUGUST 21:  A man dives into the sea in Cala Salada beach on August 21, 2013 in Ibiza, Spain. The small island of Ibiza lies within the Balearics islands, off the coast of Spain. For many years Ibiza has had a reputation as a party destination. Each year thousands of young people gather to enjoy not only the hot weather and the beaches but also the array of clubs with international DJ's playing to vast audiences. Ibiza has also gained a reputation for drugs and concerns are now growing that the taking and trafficking of drugs is spiralling out of control.  (Photo by David Ramos/Getty Images)

      Summer could not have come soon enough for Lloret de Mar, a tourist resort north of Barcelona. Despite the country's troubles, it's partying.
    • The Euro logo is seen in front of the European Central bank ECB prior to the press conference following the meeting of the Governing Council in Frankfurt/Main, Germany, on April 4, 2013.

      The global recovery has two speeds: That of the stimulus-fed U.S. and that of the austerity-starved eurozone, according to a new report.
    • The flags of the countries which make up the European Union, outside the European Parliament in Strasbourg, France.

      The "rich man's club" of Europe faces economic decay as it struggles to absorb Europe's "poor people", according to economic experts.
    • Packed beaches and Brit pubs? Not necessarily. Here's what drew travelers to one of Spain's most beautiful regions in the first place

      Spain's economic crisis is in its sixth straight year yet tourism, worth 11% of GDP, is holding its own, one of the few bright spots on a bleak horizon.
    • Photographer TTeixeira captured these images from a May Day protest in Porto, Portugal, Wednesday by demonstrators angered by economic austerity measures. "People protested with great order, but showed discontent against the government who they blame for this economic crisis," she said. "They want the government to resign and the Troika [European Commission, International Monetary Fund and European Central Bank] out of this country."

      As European financial markets close for the spring celebration of May Day, protesters across Europe and beyond have taken to the streets to demonstrate.
    • Croatian Prime Minister Zoran Milanovic delivers a speech in Mostar, on April 9, 2013. Prime Ministers from Bosnia's neighboring countries arrived in Bosnia with their delegations to attend the opening ceremony of "Mostar 2013 Trade Fair".

      As Croatia prepares to enter the 27-nation European Union, the country's Prime Minister says Italy must return to being the "powerhouse of Europe."
    • Anti-eviction activists and members of the Platform for Mortgage Victims (PAH) take part in a protest against the government's eviction laws in front of the Popular Party (PP) headquarters in Mallorca on April 23, 2013.

      Spain's unemployment rate rose to a record high of 27.2% in the first quarter of 2013, the Spanish National Institute of Statistics said Thursday.
    • People protest against the Spanish laws on house evictions outside the Spanish parliament on February 12, 2013 in Madrid, Spain.

      Spain has seen hundreds of protests since the "Indignados" movement erupted in 2011, marches and sit-ins are now common sights in the capital.