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From Populist Destabilization to Reform and Possible Debt Relief in Greece

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  • William R. Cline

    (Peterson Institute for International Economics)

Abstract

Using his European Debt Simulation Model (EDSM), Cline examines whether and to what extent additional debt relief is needed in Greece under the new circumstances. Greece's debt burden is significantly lower than implied by the ratio of its gross debt to GDP, because of concessional interest rates on debt owed predominantly to the euro area official sector. The IMF's call for debt relief recognizes the lower interest burden but argues that the gross financing requirement is on track to exceed a sustainable range of 15 to 20 percent. But in the Fund's June Debt Sustainability Analysis that threshold would not be exceeded until after 2030. A sustainability diagnosis based on such a distant future date would seem at best illustrative rather than definitive. The euro area creditors might, nonetheless, be well advised to provide two types of interest relief: an earmarked portion of interest otherwise due to finance a public works employment program; and additional interest relief to compensate for budget shortfalls caused by growth below plan levels. The sovereign debt situation should be alleviated by carrying out the bank recapitalization directly from the European Stability Mechanism to the banks, rather than through the sovereign as the intermediary. The large increase in the ratio of gross debt to GDP imposed by bank recapitalization is mostly an optical illusion because there would be a corresponding rise in state assets, but this increase could, nonetheless, further erode perceptions of sustainability.

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  • William R. Cline, 2015. "From Populist Destabilization to Reform and Possible Debt Relief in Greece," Policy Briefs PB15-12, Peterson Institute for International Economics.
  • Handle: RePEc:iie:pbrief:pb15-12
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    References listed on IDEAS

    as
    1. Robert Price & Thai-Thanh Dang & Yvan Guillemette, 2014. "New Tax and Expenditure Elasticity Estimates for EU Budget Surveillance," OECD Economics Department Working Papers 1174, OECD Publishing.
    2. William R. Cline, 2012. "Sovereign Debt Sustainability in Italy and Spain: A Probabilistic Approach," Working Paper Series WP12-12, Peterson Institute for International Economics.
    3. William R. Cline, 2014. "Managing the Euro Area Debt Crisis," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 6871, July.
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