Greece's debt cannot be cut to 120 percent of GDP by 2020, the level deemed sustainable by the IMF, unless euro zone member states write off a portion of their loans to Greece, a document prepared for euro zone finance ministers shows.
The 15-page document, circulated among ministers, the European Central Bank and the IMF for a meeting that began on Tuesday and is still going on 10 hours later, sets out in black-and-white how far off-track Greece is in reducing its debt to the IMF-imposed target, from a level around 170 percent of GDP now.
The document sets out a variety of ways in which Greece's debt ratio could be reduced between now and 2020, but concludes they would not be enough without euro zone creditors taking a hit on their own holdings -- something Germany and others have declared would be illegal.
The document does say Greek debt could fall to 120 percent of GDP two years later without having to impose any losses on euro zone member states or forcing through a buy-back of Greek debt from private-sector bondholders.
But International Monetary Fund chief Christine Lagarde rejected such an extension at similar talks last week.
Without corrective measures the document said Greek debt would be 144 percent in 2020 and 133 percent in 2022, figures first reported exclusively by Reuters last week.
"To bring the debt ratio down further, one needs to take recourse to measures that would entail capital losses or budgetary implications for euro area member states," the document says.
"Capital losses do not appear to be politically feasible and would jeopardise, at least in a number of member states, the political and public support for providing financial assistance."
Jean-Claude Juncker, the chairman of the Eurogroup of finance ministers, said at a meeting a week ago that he wanted to extend the target date to reduce Greek debt by two years to 2022, but Lagarde said the 2020 goal had to stand.
The view of the IMF, which has played a role in both Greek bailouts so far, is critical since it provides international legitimacy and credibility for the efforts the euro zone is making. If the IMF were to withdraw its support for the bailout programmes, it could have a deeply damaging market impact.
The document appeared designed in part to convince the IMF that Greek debt could be made sustainable just two years behind schedule if only it would soften its stance.
It remains possible that Lagarde could provide further wiggle room, but she is believed to favour the idea of euro zone member states taking a writedown on some of the loans extended to Greece in order to stick to the 120 percent in 2020 goal.
"In case debt should be brought down further, additional efforts from the IMF could be envisaged," the document said, suggesting the Fund could further lower the interest rate and extend the maturity on its own loans to Greece.
Ahead of the meeting, Juncker said he was hopeful of getting a deal, but acknowledged it would not be easy. Ten hours on, there was no sign of a breakthrough.
"We must still reach an understanding on several details and I would expect that the chances are good that we will come to a final and joint solution this evening," he told reporters. "But I'm not entirely certain."
Among the main measures under consideration to bring Greece's debt burden down as rapidly as possible is a debt buy-back under which Greece would offer to buy back bonds from private investors at a discount to their nominal value.
Various options are under consideration, officials have said and the document makes clear, including using about 10 billion euros to buy back bonds at between 30 and 35 cents in the euro.
There are also proposals to reduce the interest rate on loans already extended by euro zone countries to Greece, to impose a moratorium on interest payments and lengthen the maturities on loans, all of which would cut the debt burden.
Pressure for the euro zone to come up with a solution is high not just because Greece is running out of money and financial markets want a dependable solution, but because Athens has initiated virtually all the steps demanded of it to cut spending, raise taxes and overhaul its economy.
"It is clear that Greece has delivered," Juncker said.
AID PAYMENT COMING
As well as examining longer-term measures to put Greece's debt back on a stable footing, the ministers were expected to give a provisional go-ahead for the next tranche of up to 44 billion euros of emergency funds to be paid to Athens.
The tranche, which will help recapitalise Greek banks as well as keep the government afloat, could be paid as soon as December 5 as long as Greece meets the last few outstanding commitments on economic reforms.
The payment would provide immediate relief to Athens, but it is long-term debt that is the core issue.
The European commissioner for economic affairs, Olli Rehn, said as he arrived for the meeting that the euro zone should be ready to do more for Greece in the coming years, an apparent nod to the idea of government-sector debt writedowns.
"It's essential now that we take a decision on a set of credible measures on debt sustainability and, at the same time, we need to be ready to take further decisions in the light of future developments," Rehn said.
He did not elaborate, but the idea of a haircut on official loans is off the table for now because many countries, including Germany, see it as politically and legally impossible.