Another sorry debt sustainability analysis
The debt sustainability analysis (DSA) along with other documents related to the program for Cyprus was leaked today on the wires first by Reuters and then the actual documents were published in the Brussels blog of the FT.
The DSA is as expected based on massaging numbers and ignoring risks to arrive at a baseline scenario with a debt to GDP ratio that would give the troika the argument to call it sustainable and get everyone to commit to yet another EU bailout program.
Given the extent of the damage that was inflicted on Cyprus there is something that deserves at least a mention.
Graph 2 in the DSA presents the trajectory of Cyprus’s debt in the initial MoU that was agreed in November and the new baseline scenario of the finalised program.
If you have been following the developments in Cyprus you have heard all about the blue line. Cyprus’s banking sector created a massive contingent liability for the state, the amount of 10 billion for the recapitalisation of the banks would make the debt burden unsustainable, the bailout package would be the size of the entire economy and so on.
At that point, certain European countries and institutions decided to send a message and make Cyprus a test case for the new framework of bank resolutions. With this the debt burden as a percentage of GDP will now fall from just below 120% of GDP to just over 100% by 2020.
The DSA includes a good summary of the pain that Cyprus is about to experience (point 10) and outlines the downside risks that can easily throw the program off track (point 12). Then goes ahead and sets out the macroeconomic projections that entirely ignore both economic impact and risks to arrive to the level of GDP that is required to arrive to the magic number of debt sustainability.
Then the DSA includes a sensitivity analysis of the impact on the baseline scenario of deviations from the projected growth, budget primary balance and interest rates. Growth has the largest impact on the sensitivity analysis, followed by the primary budget balance and much less by the interest rates as most of the loans will come from the ESM.
The combination of these factors is captured in Graph 6.
With a policy mix that has consistently surprised negatively on growth in every country that is either in a program or simply is forced to follow the Commission’s diktat, fiscal targets that are repeatedly missed even from the most compliant of countries like Portugal, and overall DSAs from the troika that are the definition of revision, the adverse scenario in the DSA of Cyprus is the one that is most likely to materialise.
In spite of the fact that as Pawel Morski writes in this post “No human agency has achieved so much economic destruction in such a short time without the use of weapons”, the troika will still get roughly the same outcome of debt just under 120% of GDP by 2020, a number that for months has been advocating that is unsustainable.
The ‘crisis management’ that keeps on giving.