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Does Greece Need More Official Debt Relief? If So, How Much?

Author

Listed:
  • Jeromin Zettelmeyer

    (Peterson Institute for International Economics)

  • Eike Kreplin

    (German Federal Ministry for Economic Affairs and Energy)

  • Ugo Panizza

    (Graduate Institute, Geneva)

Abstract
Creditor countries and international organizations continue to disagree whether Greece should receive additional official debt relief, and if so how much. This paper first shows that these disagreements can be attributed to competing assumptions about Greece’s future capacity to repay, particularly about economic growth and the fiscal primary balance. It next evaluates the plausibility of alternative primary balance assumptions using international evidence about fiscal adjustment experiences. It concludes that primary balance paths required to make Greece’s debt sustainable are not plausible and that Greece will therefore require additional debt relief. Finally, the paper shows that the debt relief measures suggested by the Eurogroup in May 2016 (albeit with significant caveats on whether they will in fact be granted or not) could be sufficient to address Greece’s sustainability problem, provided the Eurogroup is prepared to accept both very long maturity extensions on European Financial Stability Facility (EFSF) debt (to 2080 and beyond) and interest deferrals that could lead to a large rise in EFSF exposure to Greece before it begins to decline. If the Eurogroup wishes to avoid the latter, it will become necessary to either (1) extend the scope of the debt restructuring, (2) lower the interest rates charged by the EFSF significantly below current predictions, or (3) extend European Stability Mechanism (ESM) financing beyond 2018 and delay Greece’s return to capital markets for a protracted period.

Suggested Citation

  • Jeromin Zettelmeyer & Eike Kreplin & Ugo Panizza, 2017. "Does Greece Need More Official Debt Relief? If So, How Much?," Working Paper Series WP17-6, Peterson Institute for International Economics.
    • Handle: RePEc:iie:wpaper:wp17-6
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    File URL: https://www.piie.com/publications/working-papers/does-greece-need-more-official-debt-relief-if-so-how-much
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    Citations

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    Cited by:

    1. Giancarlo Corsetti & Aitor Erce & Timothy Uy, 2020. "Official sector lending during the euro area crisis," The Review of International Organizations, Springer, vol. 15(3), pages 667-705, July.
    2. Giancarlo Corsetti & Aitor Erce & Timothy Uy, 2017. "Official Sector Lending Strategies During the Euro Area Crisis," Discussion Papers 1720, Centre for Macroeconomics (CFM).
    3. Corsetti, Giancarlo & Erce, Aitor & Uy, Timothy, 2018. "Debt Sustainability and the Terms of Official Support," CEPR Discussion Papers 13292, C.E.P.R. Discussion Papers.
    4. Cui, Wei, 2017. "Macroeconomic effects of delayed capital liquidation," LSE Research Online Documents on Economics 86156, London School of Economics and Political Science, LSE Library.
    5. Symeon Mavridis, 2018. "Greece’s Economic and Social Transformation 2008–2017," Social Sciences, MDPI, vol. 7(1), pages 1-14, January.
    6. Carmine Gabriele & Aitor Erce & Marialena Athanasopoulou & Juan Rojas, 2017. "Debt Stocks Meet Gross Financing Needs: A Flow Perspective into Sustainability," Working Papers 24, European Stability Mechanism.

    More about this item

    Keywords

    Greece; sovereign debt; debt restructuring; euro crisis; European Stability Mechanism; European Financial Stability Facility;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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