Saving the Greek Sinner

MUNICH – The euro’s current weakness has one culprit: Greece. At 14% of GDP, Greece’s latest current-account deficit was the largest of the euro-zone countries after Cyprus. Its debt-to-GDP ratio stood at 113% by the end of 2009. As this year’s deficit is projected to be more than 12% of a shrinking GDP, the debt-to-GDP ratio will soar above 125% by the end of 2010, the highest in the euro zone.

Investors have reacted by trying to get out of the euro and, in particular, steer clear of Greek government debt. Greece had to offer them increasingly higher interest rates to stay put. In January, the interest premium was 2.73 percentage points relative to German public debt. If this premium prevails, Greece will have to pay €7.4 billion more in interest per year on its €271 billion debt than it would have to pay at the German rate.

The problem is not only the premium itself, but the imminent risk that Greece will not be able to find the €53 billion it needs to service its debt falling due in 2010, let alone the estimated additional €30 billion to finance the new debt resulting from its projected budget deficit.

The Greek disaster was possible because its government deceived its European partners for years with faked statistics. In order to qualify for the euro, the Greek government asserted that its budget deficit stood at 1.8% of GDP in 1999 – well below the 3%-of-GDP limit set by the Maastricht Treaty.