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Tuesday, February 25, 2014

The long haul: managing exit from financial assistance | Guntram B. Wolff, Zsolt Darvas and André Sapir at

The long haul: managing exit from financial assistance | Guntram B. Wolff, Zsolt Darvas and André Sapir at

A good exposition & summary is by  Gabriele Steinhauser at Real Time Brussels (WSJ)

From the Conclusion

In the case of Greece, we propose a four-point plan: Greece will need to reach a balanced budget by 2018. Since a return to markets will likely proveimpossible, a third financial assistance pro-gramme amounting to about €40 billion up to2030 would fill the financing gap, ie  Greece  would not need to borrow from the market at all. Such abaseline would include further lengthening of European lending to Greece and the reduction of the interest rate spread to zero on the Greek LoanFacility. Greece could be taken out from the market until 2030 and even beyond by such a third pro-gramme  amounting     if  the primary surplus        and  pri  vatisation   targets   are reached. Continued effort is  needed to increase Greek growth. Continued sur-veillance will be beneficial to foster change andcould also be a positive signal to investors. Fur-ther measures to kick start growth will be neces-sary and should include additional funding for investment. New ideas – such as introducing acompetition among regions on good governance to access funds – should be explored. Further measures to enhance competition should be pursued. 

Greece's debt trajectory would still be vulnerable to negative shocks, in which case debt dynamics would derail. In such a case, the funding gap couldonly be closed by reducing interest rates below funding costs or touching the principal. TheEurogroup should announce its readiness toreduce    EFSF/ESM lending    rates   to zero if there is a  significant deviation from the baseline scenario, provided the country implements the required reforms and achieves the required primary budget surplus. Announcing such readiness is crucial.Otherwise the risk is that high public debt will con-tinue to undermine investment. What should beborne in mind, however, is that zero lending ratesgo against EFSF/ESM rules, which would need to be modified. In addition, obviously, EFSF/ESM shareholders would have to pick up the tab tomake up for the difference between lending ratesand borrowing costs.

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