Unlike its two predecessors, Greece’s third economic programme has been relatively successful. Since 2015, the country has been enacting most of the conditions attached to its loans. Its primary fiscal balance is back in surplus, and growth has resumed. Both government and its official creditors are hoping that this will allow Greece to return to private market financing after the programme ends in the second half of this year.
Before this can happen, however, Greece will require more official debt relief. The Eurogroup all but acknowledged this, and suggested a number of potential debt relief measures. These included early repayment of the IMF using cheaper ESM financing and maturity extensions and interest deferrals of €131 billion in loans that Greece owes to the EFSF, its largest official creditor. The European Commission and the IMF agree that Greece’s debt is not sustainable.
What remains controversial, however, is how much debt relief and how it should be delivered. These are the questions addressed in a new report published in the CEPR Policy Insight series (Eichengreen et al. 2018). The report has three main takeaways:
• Even the full set of measures considered by the Eurogroup would not be enough to restore the sustainability of Greece’s debt.
• Creditors should consider several options for improving Greece’s debt sustainability - including extending additional official financing for the foreseeable future to prevent new borrowing from expensive private sources, and applying measures of the type considered by the Eurogroup to additional official loans. However, it is unlikely that these measures will make Greece’s debt sustainable unless they are combined with reduction in principal (face value).
• Such reductions could be extended conditionally and gradually over a limited time period in a way that would create incentives for fiscal discipline while being consistent with the‘no bailout’ clause of the EU treaties.
Richard Portes and Charles Wyplosz will present their findings at this breakfast briefing, with the intention to involve all participants in an exchange of insights, allowing ample time for an interactive discussion.
