Greece economy in a wreck after two weeks of political confrontation - IMF

The last two weeks of shuttle negotiations or political confrontation between Athens and Brussels left the Greek economy in a wreck, according to a confidential report from the International Monetary Fund (IMF) seen by Reuters.

As a result, the member countries of the Eurozone were left facing a stark choice between annual transfers to the Mediterranean country’s budget or “deep up-front haircuts".

Either alternative was far beyond what euro area nations had been prepared to consider up until then.

According to the debt-sustainability analysis carried out by the Washington-based lender, Greece's debt was now seen peaking in the next two years but at levels close to 200% of gross domestic product.

That means the country's gross financing needs had been left exceeding the 15% of GDP threshhold deemed as 'safe' and there were "considerable downside risks" to those debt sustainability projections.

The study also found that in the absence of a haircut Greece would require a 30-year grace period on the entire stock of European debt, including the new loans from the IMF.

In a research report issued on Tuesday RBS's Alberto Gallo took aim at the arguments put forth by some observers, including Jens Weidmann, the president of the Bundesbank, that led them to conclude that Greece's debt was sustainable due to the currently low levels of interest rates.

"A popular argument from creditors, including Bundesbank President Weidmann, is that Greek government debt may be sustainable because interest costs are low – even though debt levels are high. This is a fallacy, in our view."

That may hold true for Japan, but for Greece, which is in a curerncy union, has lost 24% of GDP, unemployment standing at 25% and no control over monetary policy a high level of government debt is "hardly sustainable", Gallo explained.

"It may work in periods of positive growth, but what would happen in a recession? In other words, can-kicking is not enough in the Greek situation."

"For example, under a slowdown scenario where we assume Greek real growth slows to around -1% from 2020-2025, debt will go back up to 172% in 2025, deviating from the “optimistic” IMF scenario. Finally, the terms of the Eurogroup deal for Greece will make missing the IMF growth trajectory more likely in the near-term: increasing VAT and the tax base, as well as reforming pensions, will likely hurt consumption."