How to End the Greek Tragedy

Greece’s debt-service burden is too large, and it must be reduced in one of two ways: sharply cutting the interest rate paid by Greece, or reducing the face value of the debt. European policymakers are leaning towards the second option, but they evidently have not yet fully considered the implications.

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.

A possible counterargument is that Greece has a large informal economy, so its actual GDP is larger than the official figure. As a result, the debt ratios commonly applied to Greece could be overstated. But informal output is of little use for debt service if it cannot be taxed. In any case, the scope for tax increases is severely limited in an economy that is shrinking quickly.

To continue reading, please log in or enter your email address.

Registration is quick and easy and requires only your email address. If you already have an account with us, please log in. Or subscribe now for unlimited access.

required

Log in

http://prosyn.org/GRDLKre;
  1. Sean Gallup/Getty Images

    Angela Merkel’s Endgame?

    The collapse of coalition negotiations has left German Chancellor Angela Merkel facing a stark choice between forming a minority government or calling for a new election. But would a minority government necessarily be as bad as Germans have traditionally thought?

  2. Trump Trade speech Bill Pugliano/Getty Images .

    Preparing for the Trump Trade Wars

    In the first 11 months of his presidency, Donald Trump has failed to back up his words – or tweets – with action on a variety of fronts. But the rest of the world's governments, and particularly those in Asia and Europe, would be mistaken to assume that he won't follow through on his promised "America First" trade agenda.

  3. A GrabBike rider uses his mobile phone Bay Ismoyo/Getty Images

    The Platform Economy

    While developed countries in Europe, North America, and Asia are rapidly aging, emerging economies are predominantly youthful. Nigerian, Indonesian, and Vietnamese young people will shape global work trends at an increasingly rapid pace, bringing to bear their experience in dynamic informal markets on a tech-enabled gig economy.

  4. Trump Mario Tama/Getty Images

    Profiles in Discouragement

    One day, the United States will turn the page on Donald Trump. But, as Americans prepare to observe their Thanksgiving holiday, they should reflect that their country's culture and global standing will never recover fully from the wounds that his presidency is inflicting on them.

  5. Mugabe kisses Grace JEKESAI NJIKIZANA/AFP/Getty Images

    How Women Shape Coups

    In Zimbabwe, as in all coups, much behind-the-scenes plotting continues to take place in the aftermath of the military's overthrow of President Robert Mugabe. But who the eventual winners and losers are may depend, among other things, on the gender of the plotters.

  6. Oil barrels Ahmad Al-Rubaye/Getty Images

    The Abnormality of Oil

    At the 2017 Abu Dhabi Petroleum Exhibition and Conference, the consensus among industry executives was that oil prices will still be around $60 per barrel in November 2018. But there is evidence to suggest that the uptick in global growth and developments in Saudi Arabia will push the price as high as $80 in the meantime.

  7. Israeli soldier Menahem Kahana/Getty Images

    The Saudi Prince’s Dangerous War Games

    Saudi Arabia’s Crown Prince Mohammed bin Salman is working hard to consolidate power and establish his country as the Middle East’s only hegemon. But his efforts – which include an attempt to trigger a war between Israel and Hezbollah in Lebanon – increasingly look like the work of an immature gambler.