The expectation that debt relief should follow the German elections was based on a number of immovable facts. The first is that Greece is in the grip of an economic depression that has lasted six years, wiping out 30 percent of its gross domestic product -- the same contraction the U.S. suffered during the Great Depression. Greece is bleeding profusely. The second fact is that after four years of austerity measures designed to reduce Greece’s public debt, it has instead continued to grow to 175 percent of GDP. This is despite the 2012 restructuring of bonds held by the private investors, which shaved 30 percent of GDP worth of debt from what Greece owes.
The bulk of Greek debt is now in the hands of official creditors, and many thought that with elections in the rearview mirror Germany would show some flexibility -- after all, Merkel strongly opposed the private sector restructuring until she turned around and made it happen. In brief, the time has clearly come for creditor countries to forgive part of Greece’s debt, because nobody believes that the government can bring it to a sustainable level on its own.
Regling said in his interview that Greece already enjoys concessional interest rates and long maturities on its debt that amount to a form of relief -- and this is true. Last year, the average maturity of Greek debt was extended from about six years to 16 years, as a combined result of the private sector restructuring and new loans from the ESM. The annual interest rate that Greece has to pay on these new loans is low, about 3 percent. By contrast, Greece pays about 10 percent on its remaining private sector loans. All of this implies a subsidy, because Greece could never have borrowed on such conditions in the open market, to which it has lost access.
Yet whether Greece can pay the interest on its loans for now is not the issue. Greece’s problem is that absent relief, the debt will remain huge. By forfeiting commercial profit on its loans, the euro area is helping out, but these cheap loans still add to the public debt. Japan is one of the few other countries to have amassed such high levels of debt in modern times, and its “lost decade” is now in its 23rd year.
Until Greece’s nominal GDP growth, currently sharply negative, rises above the interest rate it pays on its debts, these will go on increasing as a proportion of the economy. This is simple arithmetic: Debt service costs add to the debt, the numerator, faster than GDP, the denominator, rises.
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