The Greek government owes roughly \u20ac326 billion*.<\/p>\n
Thanks to concessional financing from the Greek Loan Facility, the European Financial Stability Facility, and the European Stability Mechanism, it currently pays an effective interest rate of just under 2 per cent. Were Greece to lock in this interest expense for a sustained period, its debt burden would gradually decline. All that would be needed would be for the economy\u2019s nominal growth rate to stay above 2 per cent and for the budget excluding interest to remain in slight surplus.<\/p>\n
(Whether that would be enough to repair a society that\u2019s\u00a0suffered more than almost any other country in peacetime<\/a>\u00a0is a different question\u2026)<\/p>\n Things would be much more precarious if the Greek government couldn\u2019t continue relying on concessional financing and had to borrow from the markets. The Italian government pays an\u00a0effective interest cost<\/a>\u00a0of about 2.7 per cent and the Portuguese state pays 3.3 per cent. Applying 3 per cent, the average of those (low) numbers, to Greece would increase its total interest bill by more than half, nearly doubling the government\u2019s total deficit.<\/p>\n If the Greek government had to pay a\u00a0premium<\/em>\u00a0relative to those countries on its obligations, perhaps because it weren\u2019t included in the European Central Bank\u2019s bond-buying programme, total borrowing needs could easily triple. Without a commensurate increase in its budget surplus before interest, the Greek government\u2019s debt would balloon, both in absolute terms and relative to gross domestic product.<\/p>\n [expander_maker more=”\u0394\u03b9\u03b1\u03b2\u03ac\u03c3\u03c4\u03b5 \u03c0\u03b5\u03c1\u03b9\u03c3\u03c3\u03cc\u03c4\u03b5\u03c1\u03b1” less=”\u0394\u03b9\u03b1\u03b2\u03ac\u03c3\u03c4\u03b5 \u03bb\u03b9\u03b3\u03cc\u03c4\u03b5\u03c1\u03b1”]This is why the International Monetary Fund has\u00a0vocally recommended drastic cuts<\/a>\u00a0in the present value of the amount demanded by Europe\u2019s \u201cofficial sector\u201d creditors by, among other methods, locking in the current interest burden for decades. (The IMF hasn\u2019t volunteered to reduce\u00a0its<\/em>\u00a0claims on Greece, however.)<\/p>\n At the opposite end are Europeans, led by German finance minister Wolfgang Schaeuble, who say no changes are needed and the Greeks can afford to pay. He has also said\u00a0further debt relief would only be possible if Greece left the single currency<\/a>. Replacing concessional financing with market borrowing starting next year would be fine, in this view, because there is scope for the Greek state to tighten fiscal policy further. (The official position of the Eurogroup is somewhere in the middle.)<\/p>\n New research<\/a>\u00a0from Jeromin Zettelmeyer, Eike Kreplin, and Ugo Panizza suggests Schaeuble is wrong: there is no reasonable likelihood that the Greek government can continue without significant further debt relief. Kreplin\u2019s participation is particularly notable since he is an economist with German federal government.<\/p>\n They find that the sustained budget surpluses (before interest payments) envisioned by the Eurogroup are simply unprecedented. Betting the Greek government will be able to do something no other state has done before, at a time when its legitimacy is fragile and its economy is still in tatters, therefore seems unwise.<\/p>\n The trio followed up on an\u00a0earlier study<\/a>\u00a0by Panizza and Barry Eichengreen, who found that sustained budget surpluses implied by the euro area\u2019s \u201cfiscal compact\u201d were extremely rare, and therefore unlikely. (That study in turn was based on\u00a0research from the IMF<\/a>\u00a0on the history of fiscal tightening and covers 48 countries between 1955 and 2015.)<\/p>\n The new paper focuses on applying this history to the situation in Greece. That situation is unusual, so the trick is to parse the data in a useful way. They go through several different methodologies, the most straightforward of which is to look at the implied odds that a given budget surplus (before interest) is sustained for a given period of time once it\u2019s been reached. They further split up their sample into countries starting out with government debt greater than 60 per cent of gross domestic product and those with less debt.<\/p>\n Past experience suggests the fiscal policy expected by Schaeuble \u2014 a budget surplus before interest payments worth 3.5 per cent of GDP, sustained for 16 years \u2014 has literally no chance of happening\u00a0even if Greece were able to start generating a 3.5 per cent primary surplus by 2018, as per the targeted schedule<\/em>:<\/p>\n In other words, even if Greece manages a 3.5 per cent primary surplus in 2018, the changes of sustaining it for another 15 years is basically zero.<\/p>\n Critics might point out this kind of analysis is unfair. What matters isn\u2019t the budget surplus in any given year, but the\u00a0average<\/em>\u00a0surplus over the full period. Zettelmeyer et al looked at this too, and it isn\u2019t much more encouraging:<\/p>\n The implied odds of success for Greece are somewhere between 15 and 20 per cent. As they note:<\/p>\n International evidence does not support an adjustment path that envisages a primary surplus of above 3.5 percent for more than three to four years on a continuous basis and for more than seven years on an average basis.<\/p>\n Put another way, there is no way to make the Greek government debt sustainable without further debt relief, whether that means nominal haircuts or significant changes in the terms of official loans. (Excluding countries from their sample that successfully lowered their indebtedness with austerity in fewer than seven years doesn\u2019t change these results.)<\/p>\n The final section of their paper looks at what kinds of changes in terms might generate the desired results while also remaining consistent with past statements from the Eurogroup. It turns out there is no good solution:<\/p>\n The probability of maintaining a declining debt-to-GDP ratio is above 50 percent but below 60 percent. In that sense, debt is sustainable in these scenarios but not with high probability.<\/p>\n Perhaps these results could be considered good enough\u2014but there is a hitch. The consequence of granting very low amortization rates and further interest deferrals is not only that Greece will continue to owe money to the EFSF for a very long time but also that Greece\u2019s debts to the EFSF will continue to grow as long as interest is deferred\u2026Greece\u2019s debts to the EFSF would more than double to about \u20ac278 billion in 2050, when interest deferral is assumed to end, and then begin a slow decline, but the outstanding amount in 2080 would still be higher than it is today.<\/p>\n Although interest deferrals are part of the arsenal of debt relief measures described by the Eurogroup, an increase in exposure of this size\u2014equivalent to new large-scale lending by the EFSF\u2014is politically implausible.<\/p>\n While there are a few things that could be done to improve the outlook, such as refinancing the original bilateral loans from 2010 and the relatively expensive IMF loans with cheaper ESM funding, as well as locking in relatively low interest rates for the EFSF and ESM, none of these would be sufficient.<\/p>\n![\"\"](\"http:\/\/bestinsurance.gr\/a1\/wp-content\/uploads\/2017\/04\/4.bmp\")
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