Wednesday, February 18, 2015
Is the fiscal situation in Greece a global threat?
To evaluate the matter, it is important to differentiate between the stock of debt and the flow of new debt.
We should not be complacent about the stock of debt: it is high and probably unsustainable at 180% of GDP. Even with higher growth of economy this level of debt would be a challenge. Greece's growth is very low, demographics are unsupportive, productivity is very week. However, we should not forget that Greek debt has already been significantly restructured in such a way that it is manageable in the short-term. Altogether, current high level of Greek debt is a threat to Greece. It will probably impact its creditors as well.
On the other hand, Greek debt flows fundamentals have exceptionally improved, and have been strong. What Greeks did is almost unprecedented. Within five years, they turned their government primary balance to a surplus. Similarly, their current account, over the same period, went from a deficit of 115 to a surplus of over 1%.
So, we have a country that runs a primary budget surplus and a current account surplus, but where, partly because of austerity, there is no growth possible. Hence, the stock of debt crisis only. It can add to market volatility. If poorly handled by Eurozone powers, it can result in Euro weakness. This will hardly result in global economic threat.