The IMF’s overall methodology in examining the sustainability of sovereign debt was posted on the Fund’s blog on Thursday, with the article signed by Sean Hagan, Maurice Obstfeld, and Poul Thomsen. While the IMF’s prospective role in the ongoing Greek bailout has been in the headlines in much of Europe’s economic press over the recent period, the article has only a brief reference to the bailout-dependent country.
“For instance, in the recent case of Ukraine, creditors agreed to significant haircuts in order to reduce debt to a sustainable level as suggested by the debt-to-GDP framework. In the case of the ongoing discussions with Greece, we have instead found the framework that focuses the annual financing need to be more appropriate, mainly because Greece’s Euro area partners have opted to provide debt relief through very significant extension of maturities and reduction in interest rates, rather than through upfront haircuts.”
The trio of top IMF economists detail the two main methods employed in determining debt sustainability, namely, low GDP-to-debt ratios are failing ratios, whereby a country can return to the markets for its borrowing needs. The other method, employed when loans have a long maturity period and are pegged to low interest rates – such as in the case of Greece – is to determine if annual financing needs to cover capital and interest repayments can be satisfied by borrowing from the markets.
