Greek officials recently announced that the country's debt will rise to 189 per cent of GDP next year, rather than peak at 167 per cent as they had forecast as recently as March.
The government projects that the debt-GDP ratio will rise further to 192 per cent in 2014 rather than decline as the creditors had expected. All this means the ratio has little chance of declining to the 120 per cent target in 2020.
Debt-GDP projections were revised upward partly because the “bailouts” sponsored by the International Monetary Fund, European Central Bank and EU since 2010 have added to the debt of a country already unable to pay its obligations. Unrealistic forecasts of a Greek economic recovery were accompanied by demands for further austerity by creditor governments, pushing the country into a vicious cycle of spending cuts and recession.
A silver lining in the dark cloud is a recent suggestion by EU finance ministers and the IMF that Greece be allowed to reduce debt by purchasing it at a discount in the secondary market. Lower debt, and reduced debt service, would improve debt-related ratios and stimulate faster economic growth. But the finance ministers could not agree on how the buyback would be financed. This is where global financial markets can help without putting the burden on European taxpayers.
If the debt buyback is coupled with a sale of government-owned companies, non-performing bank loans and distressed real estate, private investors would tender the debt in exchange for the assets.
A reduction in the level of Greek debt using market mechanisms would be the first step in restarting the economic engine, allowing for growth after a five-year recession, and improving the country’s future debt service capacity. To have a significant impact, debt reduction would have to apply not only to the Greek debt held by private investors, estimated at €63 billion, but also to the ECB’s holdings of about €45 billion. The ECB’s participation in reducing Greece’s debt will do more to create renewed growth than its steps so far to increase liquidity in the European banking system.
Allowing private investors to enter the scene, acknowledging that the loans are not worth their full face value, would be the first step in recognising that Greece and Spain have a solvency crisis rather than a short-term liquidity problem.
Full article (FT subscription required)
© Financial Times
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article