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The Wasp
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Can Greece avoid a default? The numbers do not look promising.

A little snippet from a very good SocGen analysis of the possible outcomes ahead for Greece, which is well worth reading in itself, has the following paragraph which sparked my interest (emphasis mine) :

Can Greece ultimately avoid default? The sustainability of Greek public finances depends critically on the snowball effect, i.e. the difference between nominal GDP growth and the funding rate and the level of the primary surplus. Greece’s public debt today stands at almost 160% of GDP, with a primary balance forecast at -2.8% in 2011 and nominal GDP forecast at -3.1%. Even with the attractive funding rates provided by the EU and IMF (just under 4% at present), the situation is clearly not sustainable.

Making a back of the envelope calculation, we find that if Greece can sustain a primary budget balance and enjoy nominal GDP growth that exceeds the implicit interest rate on its debt by 1pp, it would take Greece 100 years to reach a debt-to-GDP ratio of 100%. If Greece in addition could sustain a primary budget surplus of 1% of GDP every year, it would take 50 years.

Theoretically, Greece can avoid default, but it depends critically on the ability to achieve growth, run a primary surplus and achieve a cheap rate of funding. If the rest of Europe wants to avoid Greek default, it seems it may be funding the country for many years to come.

A 1% budget surplus needed every year for the next 50 years to get the debt to GDP ratio back down to the 100% mark seems in itself a long shot especially when they are currently running a 2.8% deficit.

What makes that best case scenario somewhat less feasible though is the following graph (from a damned good Eurostat site that allows you to make your own graphs of whatever you choose).

The graph shows Greek government deficits as a percentage of GDP since 1998 :

Yes, not one single year of budget surplus even before the world went haywire in 2008 and not a good omen when they need to run a 1% surplus for 50 years just to get the debt levels back from fatal to merely obscene.

Much more realistic and better for all round I think if they just get on with the inevitable and leave the Euro and take the pain. For the EU elite though that would leave some very large holes in their EUSSR pipe dream and so will probably be avoided as long as the taxpayers are still willing to bend over and take it.

As an aside, it would be very interesting to see a similar analysis of the UK, soon to reach £1 trillion debt, and just how long that towering pile will be hanging over our heads.

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2 comments to Can Greece avoid a default? The numbers do not look promising.

  • Patrick Harris

    The mind boggling numbners involved bear testiment to the fact that unless Greece discovers large deposits of oil, natural gas and diamonds, there is no chance of her ever, ever paying off their national debt – EVER.
    They will also end up like Tibet – part of China.

    • Wasp

      Patrick – Indeed.

      When I saw that quote it puts the true mess into perspective – 50 years of 1% surplus to just get back to 100% debt to GDP and they haven’t managed a surplus in the last 13 years!