Despite today’s statement of EU commissioner Olli Rehn, who confirmed that an aid package for Greece could be signed next week, the debt sustainability of the country remains a key issue, according to Willem Verhagen, senior economist at ING Investment Management.
Talks on an aid to Greece started last night and are expected to resume on November 26.
“We expect that a solution will be found eventually also in view of the good faith efforts by the Greek government which managed to get the memorandum of understanding and the 2013 budget through Parliament at the cost of a further loss in its majority,” he said.
This suggests that reform fatigue in Greece is already very high and in the longer term risk remains that Greece will no longer be willing to comply with the Troika’s demands.
“It is hard to see the light at the end of the tunnel in an environment where both the private and public sector have a very high preference for saving, while external demand continues to be hampered by competitiveness problems,” he said.
The solution proposed by the International Monetary Fund involves a write down on official sector holdings of Greek debt which would also lower the value of the Greek primary balance that is consistent with a further downward debt trajectory.
“Nevertheless, from a political point of view this is very difficult to digest for the rest of the region which is why they would prefer to kick the can down the road by allowing Greece to reach the 120% by 2022,” the economist said.