The politics of debt dynamics in Greece

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As a procession of government and opposition representatives met Greek President Karolos Papoulias in the course of last week, one issue was brought to public attention that could be termed the taboo topic amid all the memorandum exit debates. Fotis Kouvelis, leader of the Democratic Left party, had the audacity to suggest that the issue of Greece’s mounting public debt obligations merits the formation of a common negotiation stance by the democratic parties vis-à-vis its international creditors.

The potential of the economic recovery in Greece will be determined by the country’s capacity to manage its sovereign debt dynamics. For 2014 the Greek government expects a debt-to-GDP ratio for Greece of 174.8 percent or a total of 318.6 billion euros. The revised projection of the IMF is slightly lower (see below). In both cases, the forecast volume for this year would again surpass the sovereign debt levels attained in 2011, i.e. before the two debt restructuring operations of 2012.

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*Data from 2014 onwards are projections. Sources: International Monetary Fund, World Economic Outlook Database, April 2014 and IMF revisions, Macropolis, October 2014.

The focus on debt dynamics instead of the total volume of accumulated sovereign debt is critical in this respect. We need to emphasise the trend and not the overall total number. The increase in the ratio of Greek public debt to pre-restructuring levels in 2012 is a matter of concern if the economic recovery turns out to be feeble and uneven for a prolonged period of time.

The single most important factor impacting on the recurring rise in Greece’s debt ratio has been the dramatic fall in nominal GDP, i.e. the euro value of the country’s economic output since mid-2008. Only if and when nominal GDP rises faster than the debt increase (in percentage terms) can we expect Greece to be able to avoid or exit this dangerous indebtedness trap.

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