Greece was pulled back from impending default Saturday, when eurozone finance ministers signed off on a vital loan installment. But the country's international creditors are showing more concern over whether it can service its debt in the long run.
Athens will get a euro12 billion ($17.39 billion) tranche of its existing euro110 billion rescue package by July 15, in time to meet several bond repayment deadlines this month and next, the finance ministers of the 17 countries that share the euro said in a statement Saturday evening. The eurozone and the International Monetary Fund will also continue to prop up Greece's struggling economy in the coming years, with a second package of aid loans to be finalized by September.
While the renewed commitments save Greece from immediate collapse, even its international creditors _ long the biggest optimists on the country's prospects _ are warning that getting down a debt of 160 percent of economic output will be a difficult balancing act.
"The Greek government debt will remain for many years at a high level and, therefore, subject to possible adverse developments that cannot be predicted," the European Commission, the EU's executive and one of the three institutions in charge of Greece's bailout, said in a report published Saturday.
Especially lower than expected economic growth "would put the debt trajectory on a clearly unsustainable upward path," the commission said.
In an illustration showing several scenario's for Greece's debt load, growth of just 1 percentage point below expectations would leave Greece's debt around 170 percent of gross domestic product past 2020, with the graph pointing firmly upward.
The report, the basis for the ministers' decision to release the July aid installment and prepare a new bailout, is the most pessimistic assessment from the commission yet. Private analysts and economists have long questioned the sustainability of Greece's debt. However, the European Union, the European Central Bank and the IMF have so far, at least publicly, upheld their belief that Greece's situation is manageable.
The Commission still maintains that it is "not unrealistic to assume" that Greece can cut its deficits to the targets set out in its bailout program, and thereby slowly chip away at its debt. But the report puts a sizable question mark over the country's ability _ and willingness _ to implement the reforms its creditors say are necessary to get the economy growing again.
"Solvency depends on the political and social conditions which allow or not the implementation of the required policies," the report cautions.
The warning has a clear ring to it, following weeks of sometimes dramatic back and forth between Greek authorities and the country's international creditors, which culminated earlier this week in the narrow passage of unpopular new austerity measures through parliament amid violent demonstrations in Athens.
"Given the length, magnitude and nature of required reforms, political and social consensus remains a prerequisite for success," the Commission said in its report, repeating calls from European leaders on Greece's opposition to start supporting the bailout program.
For the first time, the Commission's report also contains a section on debt restructuring _ including a scenario for a 40 percent haircut, a forced reduction in the value of Greek bonds.
The EU has so far ruled out any haircuts on bonds, and in its report the Commission maintains that the negative consequences of a restructuring would outweigh any gains from debt restructuring.
A 40 percent haircut would devastate Greek banks, wiping out the capital cushions and triggering massive deposit flight, the Commission warns. Restructuring Greece's debt also risks "creating a permanent shift in investor sentiment and lead to self-fulfilling prophecies for other vulnerable Member States," _ shorthand for already bailed out Ireland and Portugal, as well as weak states like Spain or Italy.
The report highlights that Greece's destiny will likely be decided by what happens within the country as well as by outside conditions it has little influence over, such as global economic growth that would provide it with a better market for exports.
Those factors are likely to overshadow any decisions on a second bailout package, which merely buys Greece more time, and the exact nature of private-sector involvement, the main open issue in the debates on a new bailout.
Eurozone finance ministries are currently trying to come up with a way of getting banks and other private creditors to contribute to a new aid program. Since a forced restructuring _ or any move that would trigger a negative reaction from rating agencies _ has been ruled out, banks will likely commit to reinvesting some of the money they get back when their existing Greek bonds expire in new debt at somewhat lower interest rates.
However, several analysts have already pointed out that such a scheme would be very costly for Greece and will not reduce its overall debt load.