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"Would this work for Greece? No, unfortunately no, because Greece is not able to pay in the future the huge debt it has, so the only option is accept it, either by accepting a slightly higher inflation in the eurozone printing the money that Greece needs or by a default...or.. by having a common european tax to pay for unemployment benefits and mobility of workers in the whole euro area. In other words, to have an european economic union."

I totally disagree with this point. Even at levels of debt piled by the 2004-09 government (they double it in absolute terms in just 5 1/2 years), Greece would still be able to serve its debt if she had to pay for them a reasonable interest rate, i.e. around 3-3.5% i.e. as high as it used to pay or as high as "risk-free" Germany pays.

"Eurozone leaders have turned a 50bn Greek solvency problem into a 1,000bn existential crisis for the European Union." David Miliband

by Kostis Papadimitriou on Sun May 22nd, 2011 at 04:26:30 AM EST
Are you sure?

Debt over GDP is higher thant 125 % so basically, at 3-3.5% you need around 4% growth with balanced budget (which needs more contractionary spending.. whcih is a feedback impossibility). Let's say Greece needs a 5% growth to pay down debt at 3%... is it really possible? Or are we asking the impossible?

Isn't it better just to slash debt at around 70-80% GDP with haircut interest rates to 1-2% and ask Greece to grow at normal 3%?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon May 23rd, 2011 at 07:53:52 AM EST
[ Parent ]
I doubt any analyst could figure this out. You have to remember that although Greek debt is now around 144% debt to GDP, the economy has massively contracted (4.5%-5% for at least two years) and so now we're measuring their ability to pay against a crippled economy. The rise in debt to GDP from 115% when this crisis started to 144% is now because of an increase in public expenditures. Greece has actually reduced expenditures.

To what degree might Greece's economy grow in a world in which it's public spending doesn't give the economy a steroid bounce? No one knows. The debt to GDP might as well be 14400% if Greece does not have a way to bounce back strong.

by Upstate NY on Mon May 23rd, 2011 at 10:35:58 AM EST
[ Parent ]
That is true as far as it goes, but also beside the point.

The reason - the only reason - that Greek sovereign debt is unsustainable is that Greek foreign debt is unsustainable, because Greece has a persistent, cycle-averaged foreign deficit in excess of any realistic growth rate for a European economy.

Currency crisis, not debt crisis.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 23rd, 2011 at 09:07:15 PM EST
[ Parent ]
And because the ECB and the Eurozone treat intra-Eurozone debt as foreign debt.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue May 24th, 2011 at 01:42:17 AM EST
[ Parent ]

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