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Greek returns

The Greek crisis was a major topic of dReport approximately a year ago. Although several bailout programmes for Greece have been designed and implemented, the situation has not yet been resolved and, for this reason, the Greek crisis will also be addressed this year – by financial markets, economic media and directly affected parties as such.

In the course of May, the Greek Parliament endorsed a number of measures to improve the government’s economic performance  by EUR 5.4 billion. The requirements of the country’s creditors should be thereby met, resulting in the provision of EUR 11 billion as the last portion of the aggregate amount of EUR 86 billion provided within the bailout programme. The Greek government needs these funds badly. Otherwise, it might not be able to settle a bond principal of EUR 3.5 billion recorded by the European Central Bank which is due this summer. 

A sufficient volume of funding will be secured for a certain time period; nevertheless, this will not provide a solution to the long-term stability of public finance. Even if maintaining long-term fiscal responsibility in the form of a primary budget surplus amounting to 1.5% of GDP were considered, it would not be sufficient for reducing the debt. Vice versa, the Greek debt would increase from this year’s 184% of GDP to 220% of GDP in 2050 and it would continue to grow at a fast pace, reaching almost 300% of GDP in 2060. Obviously, such a development is far beyond the average degree of patience of any creditor.  

There is only one option left: the write-off of a portion of the Greek debt. This may involve decreasing the burden of debt repayments rather than directly writing off the debt. There are several ways of implementing this. The International Monetary Fund has proposed a combination of a number of measures. These include postponing the interest and the principal settlement after 2040, deferring the maturity of emergency loans from other European countries and rescue funds until 2080 or fixing the interest on Greek debts to no more than 1.5%. Restructuring the Greek debt by means of all of the above-listed measures should reduce public debt to 106% of GDP in 2060. Nevertheless, even this level may not be sufficiently low. 

It is also necessary to realise that all of the measures set out above lead to a temporary reduction of the current value of the Greek debt, ie also a decrease in the value of loans and bonds held by creditors including predominantly the European Central Bank, European rescue funds (ESM, EFSF), the IMF and the Eurozone countries.

David Marek, Chief Economits, Deloitte