Greece’s Debt Looks Fairly Manageable. It’s Politics That Makes It Problematic
By Stephen Fidler, Wall Street Journal
Does Greece need debt relief? Alexis Tsipras, leader of the left-wing Syriza party and the man who could be Greece’s next prime minister, says it does.
“There is no single sensible person in the whole of Europe who seriously thinks that Greece’s debt is sustainable and must be repaid in full,” he said in a speech on Tuesday.
Yet a lot of policy makers elsewhere in the eurozone, who presumably believe themselves sensible, disagree. Forget, they argue, that Greek government debts are equivalent to an extraordinary 174% of gross domestic product. Look instead at the relatively manageable amounts Greece must pay annually to service them.
“One cannot only look at the debt level or debt ratio, that’s an inadequate analysis,” Klaus Regling, head of the European Stability Mechanism, said in September 2013.
What is important, he and others have said, is that Greece’s debt-servicing bill has dropped sharply because other eurozone countries now own 60% of Greece’s €322 billion ($380 billion) government debt. They have agreed to a big cut in Greece’s interest payments and extended its repayments out to 2054. These concessions are, Mr. Regling said, “economically the equivalent of a haircut”—a reduction in the face value of the debt.
That hasn’t convinced everybody. “Of course they are going to say that,” said Philippe Legrain, a former economic adviser to the European Commission.
Mr. Legrain says Greece should have been given debt relief back in 2010 instead of being forced to pay its debts in full—largely to the benefit of banks in Germany, France and elsewhere in Northern Europe—and submit to a harsh austerity program.
Now, saddled with the bleak political and economic legacy of that decision, eurozone governments are just “kicking the can down the road ad infinitum or at least until the current crop of policy makers is retired,” Mr. Legrain said.
He doubts Greece’s debt will fall as a share of its GDP in coming years, and certainly nowhere near the official eurozone projection of below 124% of GDP by 2020. That is in part because he thinks official forecasts for growth are way too optimistic. Those forecasts see nominal GDP growth—real growth plus inflation—of close to 5% from next year to 2020.
He is also skeptical of the assumption that Greece will run primary-budget surpluses—its budget balance before interest payments on debt—equivalent to 4% or more of GDP. That is politically unrealistic, he says. “No other country has done what Greece is being asked to do,” he said.
It’s true that Greece’s interest payments to its eurozone lenders are low in nominal terms—on average a small margin above market interest rates, which stand at close to zero today.
But the real burden is higher because inflation in Greece is negative. Prices fell by 2.6% in 2014, meaning Greece’s real interest rate exceeds a hefty 3%.
Still, Greece’s interest bill does compare favorably with that of some other countries. In 2013, for example, its bill of 4.0% of GDP compared with 5.0% in Portugal, 4.8% in Italy, and 4.4% in Ireland. Greece pays even less in cash because the eurozone has allowed Greece to delay interest payments until 2022. This year, cash payments on interest are forecast at just 3% of GDP.
Even with this interest schedule, questions remain. The first arises this year, when €16 billion of bonds and loans come due.
A big part of that is €6.7 billion in bonds held by eurozone central banks that are up for repayment in July and August. To repay those, Greece will probably need some of €7.2 billion of its remaining bailout loans. And to access those, it will need agreement from its official creditors, so far not forthcoming, that it has met the terms of its bailout program.
Another hump is expected in 2019, when maturities amount to €13.6 billion. And then in 2022, the interest that the eurozone has forgone will come due in a lump. That sum could be around €17 billion and would presumably need to be repackaged into another long-term loan.
There’s another big risk. Greek interest payments are low for now, but could rise sharply in the next few years as eurozone rates rise. Some experts argue this risk could be addressed, relatively cheaply now with today’s low interest rates, by swapping the stream of floating interest-rate obligations into fixed rates using financial markets.
The trouble is that Greece’s credit rating is too low to make this possible, so other eurozone governments would have to agree to do it.
For sure, Greece is no longer the debtor it was in 2010. Its debt is lower and its major creditors are its fellow governments in the eurozone rather than financial investors.
Those governments declared in November 2012 that they would be willing to make further concessions once Greece achieved a primary surplus—it did for the first time last year—and implemented all of the conditions of its bailout program. The concessions already made suggest that a liquidity crisis—Greece running out of ready cash—isn’t likely in the near future.
But dealing with outstanding risks, like a sudden rise in interest rates, is likely to require further forbearance from the rest of the eurozone, which in turn is likely to be conditional on Greece’s continued “good behavior.”
That is an uncomfortable position for any national politician. In narrow financial terms, Greece’s debt looks fairly manageable. It’s politics that makes it problematic.
Corrections & Amplifications
For the €142 billion of loans from the European bailout fund, Athens pays just 0.54% above short-term money-market rates, standing at close to zero today, or the bailout fund’s own cost of borrowing plus a small fee. On €53 billion of bilateral loans with eurozone governments, it pays 0.5% over money-market rates. An earlier version of this article incorrectly said the loans from the European bailout fund carried a margin of 0.5% above short-term money-market rates. (Jan. 16, 2015)
