Greek debt will become 'explosive' within 13 years, IMF warns

Greece's national debt is unsustainable and liable to become "explosive" once the country tries to refinance its loans at market interest rates from 2030, the International Monetary Fund said in a staff report.

In its first annual review of Greece's economic policies in nearly four years, IMF staff said that additional austerity measures and spending cuts would not improve Greece's financial prospects in the longer term. 

"The analysis suggests that Greece’s public debt is highly unsustainable," the IMF said.

"Even with full implementation of policies agreed under the ESM program, public debt and financing needs will become explosive in the long run, as Greece will be unable to replace highly subsidised official sector financing with market financing at rates consistent with sustainability."

It projected government debt would reach 160% of gross domestic product by 2030, but would “become explosive thereafter.”

The IMF has insisted on additional debt relief and reduced fiscal targets before it participates financially in Greece's current bailout programme. It has called on Greece's Euro area peers to offer "significant debt relief" and hold back on forcing through more austerity reforms.

Germany, which faces national elections, has resisted such moves.

"Greece has made enormous sacrifices to get to where it is now," the IMF said. "But the significant achievements in balancing the budget, closing the current account deficit, and improving the flexibility of the labour market have taken a heavy toll on the society and tested its endurance."

IMF recommended that Greece reduce the proportion of its budget spent on “unaffordably high” pensions which are paid for by high tax rates to stimulate economic growth. Greece instead should work to broaden its tax base and reduce tax rates, while providing more targeted spending to support the poor and other essential public services, it added.

“We are saying that Greece needs to take some fairly difficult decisions to make its budget much more growth-friendly,” IMF European Department Director Poul Thomsen told reporters on a conference call.

Thomsen said that too many Greek households are exempt from taxation under current policies, while spending on infrastructure, capital investment and other critical needs has been cut to very low levels in an effort to meet fiscal targets under the country's current bailout programme.

Under the constraints of the Greek government's third financial bailout since 2010 and an aging population, the country's long-term economic growth is only expected to reach about 1%, the IMF said in the report.