Professional Documents
Culture Documents
233/February 2011
CEPS Policy Briefs present concise, policy-oriented analyses of topical issues in European affairs, with the
aim of interjecting the views of CEPS researchers and associates into the policy-making process in a
timely fashion. Unless otherwise indicated, the views expressed are attributable only to the authors in a
personal capacity and not to any institution with which they are associated.
Daniel Gros is Director of the Centre for European Policy Studies. Thomas Mayer is Chief Economist with
Deutsche Bank London. The authors wish to thank without implicating them in any way Christian Kopf and
Paul de Grauwe.
Available for free downloading from the CEPS website (http://www.ceps.eu) CEPS 2011
1.
Portugal
8.00
Ireland
7.00
Italy
6.00
Spain
5.00
Greece
4.00
3.00
2.00
1.00
0.00
0906090809100912100210041006100810101012
bn EUR
16
14
12
10
Bonds bought
8
6
4
2
0
billions
As % of
domestic
deposits
2.
3.
4.
5.
Panel a
Net
international
investment
position (2009)
Net external
debt from
cumulated
current
account
Government
debt 2010
Panel b
Greece 0.8
Ireland 0.2
Portugal 1.3
Spain 0.9
Italy 0.1
Note: Net external debt is computed as the sum of current account
balances over the period 1990-2010.
Sources: Commission Services (Ameco database) and IMF
International Financial Statistics.
6.
7.
8. Concluding
remarks
Annex
With the use of a numerical example calibrated to the
case of Greece, this annex is intended to illustrate the
impact a combination of moderate debt relief and
lower interest rates can have on sustainability. To set
a very undemanding benchmark, we assume that
Greece will be able to maintain a primary surplus of
only 4% of GDP. This is much lower than what other
EU countries achieved during other periods of
budgetary consolidation (often in the vicinity of 5-6%
of GDP). We also assume that the trend growth rate of
nominal GDP will be only 3%. This is clearly an
extremely conservative assumption. Over the next few
years, the Greek economy is indeed likely to stagnate
and for some time wages and prices will have to
increase less than elsewhere in order to re-establish
competitiveness. But this should not last forever, as
implicitly assumed in our calculations. As to the
interest rate, we assume that without the debt
exchange, the Greek government would be lucky if it
could refinance itself at 7%, whereas the EFSF could
offer around 4% as argued above. We then calculated
the path for the debt-to-GDP ratio with and without
the debt exchange as proposed by us assuming that
the debt exchange yields a reduction in debt of only
around 22%, reducing public debt from the 155% of
GDP to be expected in 2012 to about 120%. The chart
below shows clearly that the debt exchange
(combined with EFSF financing) would put the
country on a stable path, whereas that would not be
the case if there were no cut in debt.
Sustainable and unsustainable paths of Greek public debt
2.5
Debt/GDP
2.0
1.5
1.0
0.5
0.0
2012
2013
2014
2015
2016
2017
2018
Debt/GDP no change
2019
2020
2021
2022
2023
2024
2025
2026
2027
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