Greece: Country Economic Forecast: 02 Feb 2012

Negotiations between officials and private creditors over a voluntary haircut on Greek debt remain slow. Greece and its official lenders have pushed for a low coupon on new discounted bonds, implying NPV losses of around 70% for private creditors. An additional €130bn in EU/IMF bailout funding is contingent on Greece reaching a deal with private sector creditors. And Athens also has to impose more austerity measures to secure the financing, which are likely to meet with political opposition. But Greece must secure the new bailout funding soon - it faces a large debt refinancing on 20 March. In a worst-case scenario, Greece could be forced into a disorderly default, which would have grave implications for an already weak economy - GDP is forecast to fall by another 6% this year. More bank support would be needed to restore confidence in the sector, and there would be serious hits to consumer and business confidence. Furthermore, the economic and financial pressures created by a disorderly default might make continued Eurozone membership unsustainable. Doubts still persist about Greece's medium-term debt dynamics. Even with near universal participation in the debt swap and the government running large primary surpluses, the debt/GDP ratio will still be well above 100% at the end of the decade. Should Greece's debt burden prove unsustainable, official lenders may need to take a haircut.