The Challenge of Restoring Debt Sustainability in a Deep Economic Recession: The case of Greece

Dr. Platon Monokroussos, Chief Market Economist, Deputy General Manager, Eurobank Ergasias S.A

The Challenge of Restoring Debt  Sustainability in a Deep Economic Recession:  The case of Greece
Dr. Platon Monokroussos

The Hellenic Observatory at the London School of Economics, European Institute, is pleased to announce the publication of their latest GreeSE  paper by Dr. Platon Monokroussos. An abstract follows and you can log here for the entire paper.

ABSTRACT
The present paper studies the evolution of the Greek public debt ratio  under different assumptions regarding the size and the degree of  persistence of fiscal multiplies, the implementation profile of the applied  fiscal adjustment and the response of financial markets to fiscal  consolidation. The main results of our simulation exercise can be
summarized as follows: a) taking into account Greece’s present debt  ratio, a fiscal adjustment can lead to a contemporaneous increase in the  ratio if the fiscal multiplier is higher than ca 0.5; b) despite the  unprecedented improvement in the underlying fiscal position since  2010, the concomitant increase in the public debt ratio can be mainly  attributed to its high initial level, a very wide initial structural deficit as  well as the ensuing economic recession; c) notwithstanding its negative  initial effects on domestic economic activity, the enormous fiscal effort
undertaken over the last 5 years leaves the country’s debt ratio in a  more sustainable path relative to a range of alternative scenarios  assuming no adjustment or a more gradual implementation profile of  fiscal consolidation relative to that implemented thus far.

Keywords: Self-defeating consolidations, fiscal multiplier, public debt,  Greece, European Commission.

*Deputy General Manager, Chief Market Economist, EFG Eurobank Ergasias S.A.