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17 May 2012

WSJ: Greece deserves credit, but debt's an issue


This article claims that many of the most painful steps of the Greek bailout have already been completed.

Consider what has been accomplished. Greece has cut its budget deficit sharply; its budget deficit excluding interest payments isn't far from balance. Eurozone politicians, defying domestic opposition, have put together two enormous bailouts for the government and engineered an ambitious restructuring of its debt, all to keep Greece from dropping the euro.

The toughest question left is Greece's remaining debt, which will increasingly be held by eurozone governments. The line from European officialdom is that Greece must repay this debt as foreseen by the bailout programme. After all, Greece and its private sector creditors just spent months negotiating a debt exchange that more than halved the value of their Greek bonds.

The bailout envisions Greece with debt at 120 per cent of gross domestic product in 2020, still very high. And many economists believe the assumptions made by the "troika" of the European Commission, International Monetary Fund and the European Central Bank in the second bailout—for example, that the Greek economy would contract only 4.7 per cent this year—are too optimistic.

Most analysts and investors agree Greece's remaining debt won't be repaid in full, whether it stays in the currency area or leaves it. Greece has missed plenty of budget targets, but over the past two years the government has cut its primary deficit—the budget deficit excluding interest payments—to 2.2 per cent of GDP in 2011 from 10.6 per cent in 2009.

That is a huge amount of austerity undertaken amid economic headwinds that make deficit-cutting particularly hard. Greece's primary deficit is now smaller than those of several other countries in the eurozone, including France, the Netherlands, Spain and Luxembourg.

Full article



© Wall Street Journal


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