Filling Europe’s bottomless pit
Filling Europe’s bottomless pitByZsolt Darvason 9th November 2012After so many packages, the Greek parliament passed another round of austeritymeasures on Wednesday night.As reported by the Financial Times, the new measuresinclude cuts of between 5 and 35 per cent in pensions and public sector salaries, taxincreases on fuel and cigarettes, and higher charges for state healthcare. Theretirement age will rise from 65 to 67 for recent entrants to the workforce.
Yet this will not at all solve the budget gap, which may seem like a bottomless pitfrom the eyes of euro-area partners. Greece has been granted two financial assistance programmes by euro-area partners and the IMF(the first in May 2010and the second in March 2012), totalling almost €240billion.But this amount will not be enough, as I concluded in a paper on themaths of the Greek public debt.While policy slippages have also contributed to the bottomless budget gap, the ever-worsening economic outlook has had a decisive role. The perceived unsustainabilityof Greek public debt has likely contributed to the much deeper than expected GDPcontraction and indeed the largestforecasting errors were made for Greece.
Figure 1: GDP per capita in major geographical regions of the EU (USA = 100),1950-2017
Figure 2: GDP outlook five years ahead, as projected by the IMF at different dates(2007=100)Source
: IMF World Economic Outlook published on the dates indicated in the legend.Note:the two vertical lines indicate 2007 and 2012. GDP is measured at constant pricesFigure 3: Employment outlook two years ahead, as projected by the IMF at different dates(2007=100)Source
: IMF World Economic Outlook published on the dates indicated in the legend.Note:the two vertical lines indicate 2007 and 2012. GDP is measured at constant pricesThere are no easy solutions for the Greek public debt overhang: a small reduction inthe interest rate on bilateral loans to Greece, the exchange of European Central Bank Greek bond holdings, buy-back of privately-held Greek debt, and frontloading of some privatisation receipts would not be sufficient. Policymakers have to recognisethat their three refusals are inconsistent: no additional funding, no restructuring of official loans, and no default and exit from the euro.Let’s keep exit excluded, for various reasons. A credible resolution is needed, whichshould involve the reduction of the official lending rate to zero until 2020 andindexing the notional amount of official loans to Greek GDP. Thereby, the debt ratiowould fall below 100 percent of GDP by 2020, and if the economy deterioratesfurther, there will not be a need for new arrangements. But if growth is better thanexpected, official creditors will also benefit.
Yet in later years (realistically, beyond 2030), Greece should try to pay back the debtrelief provided by the zero-interest lending, using an extended privatisation plan andfuture budget surpluses.
Filling Europe’s bottomless pitByZsolt Darvason 9th November 2012After so many packages, the Greek parliament passed another round of austeritymeasures on Wednesday night.As reported by the Financial Times, the new measuresinclude cuts of between 5 and 35 per cent in pensions and public sector salaries, taxincreases on fuel and cigarettes, and higher charges for state healthcare. Theretirement age will rise from 65 to 67 for recent entrants to the workforce.
Yet this will not at all solve the budget gap, which may seem like a bottomless pitfrom the eyes of euro-area partners. Greece has been granted two financial assistance programmes by euro-area partners and the IMF(the first in May 2010and the second in March 2012), totalling almost €240billion.But this amount will not be enough, as I concluded in a paper on themaths of the Greek public debt.While policy slippages have also contributed to the bottomless budget gap, the ever-worsening economic outlook has had a decisive role. The perceived unsustainabilityof Greek public debt has likely contributed to the much deeper than expected GDPcontraction and indeed the largestforecasting errors were made for Greece.
Figure 1: GDP per capita in major geographical regions of the EU (USA = 100),1950-2017
Figure 2: GDP outlook five years ahead, as projected by the IMF at different dates(2007=100)Source
: IMF World Economic Outlook published on the dates indicated in the legend.Note:the two vertical lines indicate 2007 and 2012. GDP is measured at constant pricesFigure 3: Employment outlook two years ahead, as projected by the IMF at different dates(2007=100)Source
: IMF World Economic Outlook published on the dates indicated in the legend.Note:the two vertical lines indicate 2007 and 2012. GDP is measured at constant pricesThere are no easy solutions for the Greek public debt overhang: a small reduction inthe interest rate on bilateral loans to Greece, the exchange of European Central Bank Greek bond holdings, buy-back of privately-held Greek debt, and frontloading of some privatisation receipts would not be sufficient. Policymakers have to recognisethat their three refusals are inconsistent: no additional funding, no restructuring of official loans, and no default and exit from the euro.Let’s keep exit excluded, for various reasons. A credible resolution is needed, whichshould involve the reduction of the official lending rate to zero until 2020 andindexing the notional amount of official loans to Greek GDP. Thereby, the debt ratiowould fall below 100 percent of GDP by 2020, and if the economy deterioratesfurther, there will not be a need for new arrangements. But if growth is better thanexpected, official creditors will also benefit.
Yet in later years (realistically, beyond 2030), Greece should try to pay back the debtrelief provided by the zero-interest lending, using an extended privatisation plan andfuture budget surpluses.
© Bruegel 2011www.bruegel.org 1 Policy contribution 2012/19The Greek debt trap: an escape planZsolt Darvas7 November 2012Highlights: Without corrective measures, Greek public debt will exceed 190 percent of GDP, instead of peakingat the anyway too-high target ratio of 167 percent of GDP of the March 2012 financial assistanceprogramme. The rise is largely due to a negative feedback loop between high public debt and thecollapse in GDP, and endangers Greek membership of the euro area. But a Greek exit would havedevastating impacts both inside and outside Greece. A small reduction in the interest rate on bilateral loans, the exchange of European Central Bank holdings, buy-back of privately-held debt, and frontloading of some privatisation receipts areunlikely to be sufficient. A credible resolution should involve the reduction of the official lending rate to zero until 2020, anextension of the maturity of all official lending, and indexing the notional amount of all official loansto Greek GDP. Thereby, the debt ratio would fall below 100 percent of GDP by 2020, and if theeconomy deteriorates further, there will not be a need for new arrangements. But if growth is betterthan expected, official creditors will also benefit. In exchange for such help, the fiscal sovereignty of Greece should be curtailed further. An extendedprivatisation plan and future budget surpluses may be used to pay back the debt relief. The Greek fiscal tragedy highlights the need for a formal debt restructuring mechanism.Zsolt Darvas(zsolt.darvas@bruegel.org)is a Research Fellow at Bruegel. Thanks are due to Jean Pisani-Ferry, André Sapir and Guntram B. Wolff for excellent comments and suggestions and LiSavelin for research assistance.
© Bruegel 2011www.bruegel.org 2 1. Introduction The European policy stance toward the Greek public debt tragedy can be summarised as threerefusals: No additional funding beyond what has already been committed so far; No restructuring of official loans; No default and exit from the euro area.Instead, discussion of debt relief for Greece has focused on stronger external enforcement of fiscaltargets, some further interest rate cuts on bilateral loans to Greece, exchanging the Greek bondholdings of the European Central Bank (which were acquired through the Securities MarketProgramme in 2010), buying-back traded Greek bonds at their current low market price, orextending the maturities of official loans. However, these options are insufficient, as wedemonstrate in this Policy Contribution.Without corrective measures, the Greek public debt ratio will exceed 190 percent of GDP in theyears to come, despite the success of the Greek debt exchange in March/April 2012 (Appendix 1)1.Such a debt ratio is more than three-times the 60 percent of GDP Maastricht limit and it is generallythought that Greece would not be able to borrow from the market at a reasonable interest rate till theratio falls well below 100 percent of GDP. While policy slippages have also contributed to theskyrocketing debt ratio, the ever-worsening economic outlook has had a decisive role. Figure 1shows that the Greek outlook has worsened substantially in every update of the InternationalMonetary Fund's World Economic Outlook (WEO) since April 2008, including the most recentupdate from April to October 2012. Greece's cumulative real GDP decline is expected to be 22percent relative to the pre-crisis peak, while the cumulative employment fall is 21 percent: reallydramatic figures2. The number of employed people in 2013 will be lower than any time since 1980.1The October 2012 World Economic Outlook of the IMF foresees a peak in debt/GDP ratio at 182 percent of GDP in 2013, but thisprojection quickly became outdated because of the 22 October 2012 Eurostat data revision, which revised upward the 2011 debt ratioby 5.2 percentage points of GDP (as the consequence of a downward revision of GDP). The March 2012 fiscal adjustment andprivatisation targets of the second financial assistance programme are unlikely to be met, increasing the debt ratio further.2The October 2012 version of the WEO does not yet consider the recent data revision: chaining IMF growth forecasts to the reviseddata, the contraction in real output would reach 24 percent from 2007 to 2013.
© Bruegel 2011www.bruegel.org 3 Figure 1: GDP and employment outlooks for Greece, as projected by the IMF at differentdates (2007=100)Source: IMF World Economic Outlook published on the dates indicated in the legend. Note: IMF publishes GDPprojections five years ahead, while employment projections are published only for two years ahead. The two verticallines indicate 2007 and 2012, respectively. GDP is measured in constant prices. The high public debt ratio and the deep economic contraction feed off each other, especially whenthere are widespread expectations of a Greek euro exit. With an increasing debt ratio, more fiscalconsolidation is needed which in the short term has a negative impact on output. But moreimportantly, when several consolidation packages follow each other, the government and theparliament may be unable or unwilling to pass new measures, perhaps due to social pressure andunrest. That can lead to a collapse of the government, domestic political paralysis and a stop inexternal financial assistance.. Without external financial assistance, the Greek state may default,which could culminate in an accelerated and possibly uncontrolled exit from the euro area, withdevastating consequences both inside and outside Greece. The prospect of euro exit discouragesprivate investments and increases incentives for tax evasion and capital flight, thereby dragginggrowth down further and worsening the fiscal situation (Darvas, 2012). Restoring public debtsustainability, and thereby resisting euro exit speculation, is a necessary (though not sufficient)condition for stopping further economic contraction.This Policy Contribution analyses various options for bringing down Greek public debt to asustainable level and concludes that the three refusals of no new funding, no restructuring of officialloans, and no default and exit from the euro area are inconsistent. There are no easy solutions. Oneor more of these refusals needs to be given up. We make a proposal on how the Greek public debtoverhang can be addressed for the benefit of both Greece and its official lenders.2. Greek public debt before and after the debt exchange Unfortunately, it is very difficult to get accurate data on the composition of Greek public debtaccording to both creditors and instruments, because national and Eurostat statistics differ. Thelatest comprehensive reviews, European Commission (2012) and IMF (2012a), were published inMarch 2012. For total public debt, we used the Eurostat general government gross debt statistics for2011 (which are also used by the Commission and the IMF in designing the financial assistanceprogramme). For the 2012 figure we use the October 2012 WEO projection. Using availableinformation, our estimates for the composition of debt are indicated in Table 1.
8090100110120060810121416GDP (constant prices)80848892961001042006200820102012 April 2008October 2008 April 2009October 2009 April 2010October 2010 April 2011September 2011 April 2012October 2012Employment
Δεν υπάρχουν σχόλια:
Δημοσίευση σχολίου