Without corrective measures, Greek public debt will exceed 190 percent of GDP, instead of peaking at the anyway too-high target ratio of 167 percent of GDP of the March 2012 financial assistance programme. The rise is largely due to a negative feedback loop between high public debt and the collapse in GDP, and endangers Greek membership of the euro area. But a Greek exit would have devastating impacts both inside and outside Greece.
A small reduction in the interest rate on bilateral loans, the exchange of European Central Bank holdings, buy-back of privately-held debt, and frontloading of some privatisation receipts are unlikely to be sufficient.
A credible resolution should involve the reduction of the official lending rate to zero until 2020, an extension of the maturity of all official lending, and indexing the notional amount of all official loans to Greek GDP. Thereby, the debt ratio would fall below 100 percent of GDP by 2020, and if the economy deteriorates further, there will not be a need for new arrangements. But if growth is better than expected, official creditors will also benefit.
In exchange for such help, the fiscal sovereignty of Greece should be curtailed further. An extended privatisation plan and future budget surpluses may be used to pay back the debt relief.
The Greek fiscal tragedy highlights the need for a formal debt restructuring mechanism.
Add a comment
Dionysios Chionis 18th November 2012
With the first resheduling of the greek debt the greek banking and isurance system bacome invalid. The OSI have to take into consideration that there is no any room for any further reduction of bond value held by the greek banks and insurance funds
Reply to Dionysios Chionis | Report comment
Van Rompuy, Geert 16th November 2012
Problems will never be solved without a fundamental change in Greek attitudes towards taxation, corruption, fraud. Without such a change in attitudes it is a story without an end.
Reply to Van Rompuy, Geert | Report comment
Vassilis Gaitanos 12th November 2012
I would also vouch to its pragmatism for very rarely we see similar unbiased content! Heads-up to the author.
Reply to Vassilis Gaitanos | Report comment
francesco Totino 10th November 2012
Rebuilding the Italian social system and the same way also the greek system : the Anticorruption Law
http://economicsandpolicy.blogspot.it/2012/09/anticorruption-law.html
Reply to francesco Totino | Report comment
Dinitris Chatzakis 9th November 2012
At last a realistic article for the Greek debt crisis. We must understand that greek debt crisis is the begining of the paneuropean debt crisis.Congratulation Zsolt
Reply to Dinitris Chatzakis | Report comment