Politics Risk Tripping Up Greece on Debt Relief

16/1/2015

By Stephen Fidler

Greece’s Debt Looks Fairly Manageable. It’s Politics That Makes It Problematic

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.

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