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.
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. 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.