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Sustainability of Greek Public Debt

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  • William R. Cline

    () (Peterson Institute for International Economics)

Abstract

On July 21, 2011, the heads of government of the euro area announced a new plan to address the Greek debt crisis. This policy brief presents a simulation exercise that examines whether the new arrangements are likely to provide a sustainable solution. The analysis focuses on four key measures: gross debt relative to GDP; net debt relative to GDP; net interest payments relative to GDP; and amortization of medium- and long-term debt coming due during the year in question, relative to GDP. The new Greek package shows prospective future progress on all four measures, and Greek debt looks much more sustainable after the package than before. In the central baseline through 2020 after the July 2011 package, gross debt peaks at 175 percent of GDP in 2012, then falls to 113 percent by 2020; net debt falls from 121 percent of GDP in 2011 to 69 percent by 2020; purchase of private-sector involvement (PSI) collateral boosts assets from €76 billion in 2010 to about €150 billion by 2015; the interest burden falls from 7.2 percent of GDP in 2011 to 5.2 percent by 2020; amortization falls from 12 percent of GDP in 2011 to 6.5 percent by 2015, 0.5 percent in 2020; the primary surplus rises from –0.8 percent of GDP in 2011 to +6.4 percent by 2014 and after; and the average interest rate on public debt plateaus in a manageable range of about 4.5 percent. These results suggest that Greece can manage its sovereign debt under the new package so long as it meets the fiscal adjustment targets. So far the evidence is that Greek political leaders are willing to take the extensive and unpopular measures necessary to do so.

Suggested Citation

  • William R. Cline, 2011. "Sustainability of Greek Public Debt," Policy Briefs PB11-15, Peterson Institute for International Economics.
  • Handle: RePEc:iie:pbrief:pb11-15
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    File URL: https://piie.com/publications/policy-briefs/sustainability-greek-public-debt
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    1. André Sapir, 2011. "A Comprehensive Approach to the Euro-Area Debt Crisis," ULB Institutional Repository 2013/174297, ULB -- Universite Libre de Bruxelles.
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    Cited by:

    1. Tielens, J. & van Aarle, B. & Van Hove, J., 2014. "Effects of Eurobonds: A stochastic sovereign debt sustainability analysis for Portugal, Ireland and Greece," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 156-173.
    2. William R. Cline, 2013. "Debt Restructuring and Economic Prospects in Greece," Policy Briefs PB13-3, Peterson Institute for International Economics.
    3. William R. Cline, 2012. "Interest Rate Shock and Sustainability of Italy's Sovereign Debt," Policy Briefs PB12-5, Peterson Institute for International Economics.
    4. William R. Cline, 2012. "Sovereign Debt Sustainability in Italy and Spain: A Probabilistic Approach," Working Paper Series WP12-12, Peterson Institute for International Economics.

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