Part 2: Sustainable Greek Debt?

Sustainable Greek Debt? « DARECONOMICS.

Euro zone to seek Greek aid deal without write-off | Reuters.

Euro Chiefs Claim Greek Progress, Seek to Persuade ECB – Bloomberg.

The Farcical Tragicomedy Of The “Sustainable” Greek Debt/GDP “Denominator” | ZeroHedge.

In the first part of this post (, I noted that troika projections of future Greek GDP growth had become more generous over time in order to maintain the illusion of a “sustainable” 120% debt to GDP ratio being achieved by 2020. Today, I would like to examine how these unrealistically rosy projections are hiding the certainty that Greece will default on its debt. The Greek bailout talks today are merely advancing a cynical plot by the German government to delay the default so that it may secure victory in upcoming elections.

From Zerohedge, note the highlighted areas in the chart below:

After bottoming out in 2014, Greece isexpected to average over 4% growth for eight years in a row. To place this in context, economic powerhouse Brazil has only averaged 3.18% growth over the last 20 years. This forecast materially affects all the numbers in the troika’s assessment.

Here is Greece’s recent performance:

Historical Data Chart

The country has not grown at even a 1% clip in years. If we change Greece’s growth rate to 2% per year from 2014 to 2022, a more realistic picture of Greece’s debt to GDP ratio emerges. Using the standard compound growth formula, Greece’s GDP rises to only €222bn by 2022. This means that Greece’s Debt to GDP ratio will be 132% in 2022, all else being held equal.

However, all else will not be equal. If we reduce Greece’s revenues in line with the reduction of GDP growth, the government will lose about €20bn in tax revenues over the period in question. Adding that to Greece’s debt in 2022 makes €314bn euro in debt divided by the GDP of €222 gives us a whopping 141% ratio.

My assessment is more realistic than the troika’s but still very optimistic. There are only two conclusions that follow from this data. Either Greece will default, or it must become permanent ward of the troika with permanent financing being provided by the Eurozone and ECB with occasional grants to cover shortfalls. I really do not see the northern tier agreeing to make Greece its dependent; hence, the country will be allowed to default at a time when it is convenient but not until after German elections.

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