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Greece – Debt forgiveness is not a necessary precondition for restoring debt sustainability

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Dr. Platon Monokroussos

Dr. Platon Monokroussos

In our October 7, 2013 Greece Macro Monitor*, we presented a technical study on Greek public debt, forecasting a significant improvement in its dynamics after 2014 and explaining why the present elevated debt-to-GDP ratio may not by itself be the proper metric for assessing fiscal sustainability[1].

The present note extends our analysis by demonstrating that under certain conditions outright debt forgiveness is not a strict prerequisite for restoring the sustainability of the country’s fiscal position. More specifically, we provide a hypothetical scenario of a new debt relief package for Greece, involving lower interest rates on and extended maturities of EU loans and show that such a packagecan both facilitate the fulfillment of the agreed debt ratio targets and improve the manageability of the government borrowing requirement on a multi-decade basis. Before presenting in more detail the underlying assumptions and results of our analysis, we emphasize that the scenario presented herein is a hypothetical one and as such, it does not necessarily reflect our expectation about the modalities of a new debt relief package for Greece by the official sector.[2] Instead, our analysis aims to (i) demonstrate that there is a whole range of possibilities open to official lenders in structuring of a new relief package in such a way so as to facilitate the attainability of the agreed program targets for the debt-to-GDP ratio; and (ii) provide a sound counterargument to some recent claims that outright debt forgiveness (i.e., haircuts on official-sector loans) is the only possible way to restore the sustainability of Greece’s fiscal accounts.

GREECE Macro Monitor – October 31, 2013


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