How to End the Greek Tragedy

SANTIAGO – European leaders, faced with the reality of an insolvent Greece, are reportedly now considering a “Plan B” that would involve reducing the burden of its future debt payments. This is a welcome contrast to the options considered so far, all of which involved – under different guises – foisting more debt onto a country that has too much of it already.

Greek public debt today stands at nearly 160% of the country’s official GDP. Suppose Greece took 25 years to bring it down to the Maastricht ceiling of 60%. If the real interest rate on Greek debt were 4% (more or less what Greece is paying now for the emergency loans from the European Union) and annual GDP grew by 2% on average, the required primary fiscal surplus each year for the next quarter-century would be 5.7% of GDP. That is an unimaginably large burden, and it risks condemning Greece to permanent recession and social unrest.