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A Tale of Two Debt Write-Downs

SINGAPORE – At the end of 2015, Greece’s public debt was 176% of GDP, while Japan’s debt ratio was 248%. Neither government will ever repay all they owe. Write-offs and monetization are inevitable, putting both countries in a sort of global vanguard. With total public and private debt worldwide at 215% of world GDP and rising, the tools on which Greece and Japan depend will almost certainly be applied elsewhere as well.

Since 2010, official discussion of Greek debt has moved fitfully from fantasy to gradually dawning reality. The rescue program for Greece launched that year assumed that a falling debt ratio could be achieved without any private debt write-offs. After a huge restructuring of privately held debt in 2011, the ratio was forecast to reach 124% by 2020, a target the International Monetary Fund believed could be achieved, “but not with high probability.” Today, the IMF believes that a debt ratio of 173% is possible by 2020, but only if Greece’s official European creditors grant significant further debt relief.

Greece’s prospects for debt sustainability have worsened because the eurozone’s authorities have refused to accept significant debt write-downs. The 2010 program committed Greece to turn a primary fiscal deficit (excluding debt service) of 5% of GDP into a 6% surplus; but the austerity needed to deliver that consolidation produced a deep recession and a rising debt ratio. Now the eurozone is demanding that Greece turn its 2015 primary deficit of 1% of GDP into a 3.5%-of-GDP surplus, and to maintain that fiscal stance for decades to come.

But, as the IMF rightly argues, that goal is wildly unrealistic, and pursuing it would prove self-defeating. If talented young Greeks must fund perpetual surpluses to repay past debts, they can literally walk away from Greece’s debts by moving elsewhere in the European Union (taking tax revenues with them).