By Gabriele Steinhauser, Wall Street Journal

Greece should get a new €40 billion bailout and the euro zone should be prepared to forego interest payments from the government if if the country’s debt remains too high, economists at a Brussels think tank  argued on Thursday.

According to the paper published by economists at Bruegel, the additional easing of Greece’s bailout terms currently under discussion* would still leave Greece’s debt at 120% of gross domestic product by 2022 – far off the target of “substantially lower than 110%” that the euro zone agreed with the International Monetary Fund in November 2012. By 2030, Greece would have to issue some €74 billion in new bonds and still have a debt-to-GDP ratio of 95%.

And this calculation is based on a growth and budget performance that even the paper’s authors – economists Zsolt Darvas, André Sapir and Guntram Wolff – concede is optimistic. For their model, the three economists assumed that Greece would hit all targets for economic growth and primary budget surpluses outlined in its bailout program. Since growth forecasts only exist until 2018, they used a Consensus Economics forecast for Spain for the period after that, while the long-term primary surplus was taken from an IMF study on successful fiscal consolidations (more details on p. 6).

For Greece, that means a primary surplus of between 3.1% as well as nominal GDP growth of 3.7% from 2022 to 2030. In addition, Greece would have to be able to borrow on international markets at an interest rate of just 2 percentage points above that of Germany.

The chances of all this happening over such a long period are pretty low, the three economists warn. (In economist speak: “The baseline debt trajectory is exposed to risks, which can easily jeopardize a more significant reduction in the debt ratio and may even put it on an escalating path.”)

Changes to the baseline scenario, such as a 1-percentage-point drop in average annual growth or primary surplus or a 1-percentage-point increase in market rates on Greek bonds, would keep Greece’s debt close to 120% of GDP in 2030. That scenario would also require the government to raise a whopping €145 billion on the markets, the paper says.

Given this rather dire outlook, the Bruegel economists have come up with a plan for Greece’s next bailout program:

1) An extra €40 billion in loans should keep Greece out of the market beyond 2030, as long as it can keep a 4% primary surplus from 2022 onward and manages to raise the targeted €21 billion from privatizations.

2) To kick-start growth, Europe needs to spend much more money investing in Greece, for starters by boosting the capital of the European Investment Bank.

3) Crucially, however, the euro zone should be ready to forgive Greece all interest payments on its bailout loans, should it fail to reach its debt-reduction targets despite fulfilling all reform and spending promises.

The Bruegel economists argue that forgiving interest payments would be the “least unacceptable” option for bringing down Greece’s debt. In contrast to an outright cut to the principal of Greece’s debt, or having the euro zone’s bailout fund take direct stakes in Greek banks, it would allow the euro zone to maintain pressure on Athens to meet its other program targets.

Given that foregoing interest payments goes against the current rules of the euro zone’s bailout funds – and may raise concerns about monetary financing – those proposals should make for interesting discussions between Europe and the IMF “after the summer.”

The paper also modeled the debt sustainability of Ireland and Portugal and urges Lisbon to seek a precautionary credit line when it exits its current bailout program in May. The economists also warn that disappointing growth and higher spending could require Portugal’s debt to be restructured in the future.