Debt sustainability warning from Brussels

Debt sustainability warning from Brussels

The European Commission issued on Wednesday a warning to Athens that the market support measures during the pandemic should not be excessive so that they do not jeopardize the sustainability of the public debt. It also highlighted that the debt will remain at risk unless growth is supported, which makes it imperative that reforms continue and the Next Generation EU resources are put to full use.

“Given the level of the public debt and the great long-term sustainability challenges before the Covid-19 pandemic, it is important to safeguard that during taking support measures the fiscal sustainability is maintained in the medium term,” Brussels noted in the context of the European Semester report for this fall, addressing Greece and five other member-states. Greece and Cyprus are among the countries with “excessive imbalances,” mainly due to their high deficits.

The eighth enhanced surveillance report on Greece praised the government for its reforms – mainly the new bankruptcy code – despite the pandemic. Overall, it is a positive report that does not raise any new issues amid the pandemic, and accepts that the payment of overdue pensions will be extended by six months until the end of 2021.

Consequently Greece has secured the Commission’s approval for the disbursement of 767 million euros from eurozone central banks’ earnings from Greek bond holdings (SMPs and ANFAs) that will be used to ease Greece’s debt. The final decision is expected at the November 30 Eurogroup.

Nevertheless, the Commission insists that the country will suffer one of the biggest contraction rates in the European Union due to its dependence on tourism.

In the debt sustainability report the baseline scenario foresees the debt-to-gross domestic product ratio returning to a path of decline, despite the short-term increase due to the coronavirus: The debt is expected to climb to 207.1% of GDP this year before dropping to 199.6% of GDP in 2021, to 193.1% in 2022 and eventually to 64% in 2060.

Brussels concedes that the baseline scenario depends on many uncertain factors, with one adverse scenario putting financing needs above 20% of GDP in the mid-2030s.

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