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Abstract

The International Monetary Fund and the European Stability Mechanism softened their crisis lending policies repeatedly to deal with the Greek debt crisis, but the analysis of debt sustainability still acts as the gatekeeper for access to official financing. We explore the underlying mechanics of debt sustainability analysis and show that the standard model is inappropriate for Greece since it ignores the highly concessional terms of Greek debt. Greek debt has been restructured repeatedly, and now two-thirds of the stock contains grant elements of about 54 percent. The present value of outstanding Greek debt is currently about 100 percent of GDP and will rise to about 120 percent under the new program. Greek debt sustainability therefore is less a problem of the debt stock. By simulating different paths of the gross financing needs, we show that there may be liquidity problems over the medium to long terms (in particular, in 2035 and beyond). However, our estimation of the financing need is subject to high uncertainty and mainly depends on whether Greece will be able to regain access to markets at reasonable terms.

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