The pandemic and Greece’s debt: the following day

Like the remainder of the world, the Greek economic system entered one other deep financial recession in 2020. Whereas the economic system seemed to be on a modest restoration from its “nice melancholy” of 2010-2016, it was hit by a brand new disaster. main worldwide economic system. shock as a result of Covid-19 pandemic.

Greece seems to have skilled a really deep recession in 2020 and even below optimistic assumptions a full restoration will take a while past 2021. As well as, the recession and the price of measures to alleviate it have already led to an extra enhance Greece’s already exorbitant public debt.

As with all different nations, the speedy downside is find out how to cope with the short-term well being and financial results of the pandemic. It would get slightly simpler, as a result of inflow of extra funds by means of the EU’s new Restoration and Resilience Facility, however there isn’t a doubt that Greece’s excessive debt-to-GDP ratio will rise additional.

Growing public borrowing to assist the economic system within the quick time period is actually the fitting answer, each globally and for Greece. Nevertheless, the rise in borrowing is shifting lots of the issues into the longer term. As within the aftermath of wars, within the aftermath of a significant financial downturn similar to the present recession, every nation should sort out the issue of debt reimbursement, or a minimum of of lowering its public debt-to-GDP ratio.1

So how is Greece paying the price of the pandemic? By analogy, the query is much like that of Keynes’ well-known 1940 essay on “Learn how to Pay for Struggle.”

There are three various strategies of coping with a pointy enhance in public debt, such because the one occurring throughout this disaster. First, there may be the numerous enhance in taxation and the discount in major public spending instantly after the top of the disaster, due to an “austerity” coverage. The second is restructuring and even partial cancellation of debt. The third is “gradual adjustment,” which is in impact the continued postponement of great debt discount, with the expectation that debt will progressively lower relative to GDP by means of financial development and inflation.

Greece skilled austerity primarily between 2010 and 2018. The worldwide disaster of 2007-2009 led to a rise in Greece’s public and exterior debt ratios. The austerity of the interval 2010-2018 led to a Greek “nice melancholy”. On account of the “Nice Despair,” the debt-to-GDP ratio skyrocketed as a substitute of falling, regardless of the massive and anticipated fiscal adjustment. From 103% of GDP in 2007, at the beginning of the 2007-2009 disaster, and 127% of GDP in 2009, in 2018, with the top of adjustment and austerity applications, public debt had soared to 186% of GDP. Regardless of the big prices paid by staff, the self-employed, retirees and the unemployed, the consequences of austerity on public debt have been disappointing.

Determine 1 exhibits how Greece’s debt sometimes rises in instances of recession and stagnation and solely stabilizes in instances of restoration and development. The debt-to-GDP ratio elevated together with unemployment through the recessions of the early Eighties and the lengthy interval of stagnation till 1993, then elevated once more considerably through the world disaster of 2007-2009 and the ` 2010- 2016 Greek “ nice melancholy ”.2

Determine 1 Public debt and unemployment in instances of development, stagnation and recession in Greece

Greece additionally skilled the second methodology of debt administration, restructuring and partial cancellation of its debt, in 2012. Regardless of the attendant issues, the outcomes had been considerably higher. The rise in debt was quickly halted and the price of servicing it was diminished, leading to extra favorable debt dynamics. As well as, the fee has been paid by holders of Greek authorities bonds and shareholders of Greek banks, in all probability richer than the low-paid, the retired and the unemployed.3

Nevertheless, it’s uncertain that this might be repeated within the present context. First, a big a part of Greece’s debt is now authorities debt held by different sovereigns by means of the ESM. Second, the debt downside created by the present disaster is world and doesn’t solely have an effect on Greece or the peripheral eurozone economies, as in 2010-2011. It is extremely unlikely that the core euro space economies danger shedding their credibility with present and future buyers by restructuring or canceling their debt, or if, given the rise in their very own public debt, they’ll comply with d ‘bear a part of the price of restructuring the debt of peripheral economies like Greece.

This leaves us with the third methodology, that of “gradual adjustment”. That is how the general public debt of the USA, Nice Britain and different European economies fell relative to GDP after World Struggle II. That is additionally how Greece stabilized its debt-to-GDP ratio through the restoration and development interval 1994-2007. Nevertheless, this answer has an necessary precondition: the nominal yield on authorities bonds should stay beneath the sum of GDP development and inflation for a comparatively lengthy interval.

Determine 2 Public debt, wars and recessions in Nice Britain, 1792-2016

In the course of the first thirty years after the struggle, this objective was achieved internationally by means of fast financial development and “monetary repression”. The latter required important authorities intervention in monetary markets and capital controls in an effort to hold rates of interest low.

Within the case of Greece through the interval 1994-2007, this was achieved due to the discount in rates of interest and the financial restoration caused by the “convergence recreation”, that’s to say the prospect to hitch the euro zone, then participation within the euro zone itself. Rates of interest fell quickly and remained low as a result of important discount within the danger and devaluation premium and inflationary expectations. This has resulted in elevated consumption and funding and accelerated financial development. Sadly, this has additionally brought on a persistent widening of the present account deficit, which was on the root of the 2010 debt disaster (Baldwin and Giavazzi 2015, Gourinchas et al. 2016, Alogoskoufis 2012, 2021).

The “gradual adjustment” methodology has confirmed to be very efficient in combating massive will increase within the public debt of main industrial economies, often after wars or deep recessions. Britain’s expertise after the Napoleonic Wars and WWII, as proven in Determine 2, is a major instance. Quite the opposite, austerity after World Struggle I or after the nice recession of 2008-2009 led to additional will increase in Britain’s debt-to-GDP ratio.

Can a coverage of “gradual adjustment” after the present disaster reach an period of liberalization of monetary markets and capital actions? If this had been the case, a big a part of the price of the adjustment can be handed on to buyers who’re more likely to be richer in authorities bonds, in addition to to future generations, who would have benefited from increased financial development. The issue is whether or not rates of interest can keep low for the lengthy time frame it takes for “gradual adjustment” to succeed. This will likely require a coverage of intervention within the monetary markets, along with the accommodating financial coverage of central banks. As well as, this answer carries the danger that economies will stay susceptible for a very long time to the danger of a brand new monetary disaster. Clearly, Greece wouldn’t be capable of implement such a coverage by itself. This could require the adoption of a typical coverage of “gradual adjustment” for your entire euro space.4

In conclusion, these are the three choices for Greece to cope with the rise in its debt after the present disaster. Not one of the three is painless and every has completely different redistributive results, entails completely different dangers, and has completely different exterior preconditions. What is definite is that when the pandemic subsides, all economies should sort out the debt downside by combining the above three strategies. Greece should adapt its response to that of the remainder of the euro zone.

In any case, it is crucial that the Greek authorities doesn’t abandon the reformist development agenda on the premise of which it was elected in June 2019 as a result of pandemic. Nationwide reforms that can facilitate a dynamic and sustainable restoration from the present disaster will go an extended approach to serving to Greece sort out its debt downside, regardless of what’s determined on the eurozone degree.

The references

Alogoskoufis, G (2012), “Greece’s sovereign debt disaster: retrospective and outlook”, GreeSE Paper no. 54, Hellenic Observatory, London College of Economics, London.

Alogoskoufis, G (2021), “The Greek Financial system earlier than and After the Euro”, Working Paper no 2-2021, Athens College of Economics and Enterprise, Athens (to seem in Alogoskoufis, G and Ok Featherstone (2021), Greece and the euro: from disaster to restoration, Hellenic Observatory, London College of Economics, London).

Alogoskoufis, G (2019), Dynamic macroeconomics, Cambridge, MA: MIT Press.

Baldwin, R and F Giavazzi (2015), The euro zone disaster: a consensual view of the causes and a few attainable cures, CEPR Press, September 7.

Bartsch, E, A Bénassy-Quéré, G Corsetti and X Debrun (2020), “Stronger collectively? The policy-mix strikes again»,, December 15.

Blanchard, OJ (2019), “Public debt and low rates of interest”, American Financial Evaluate 109 (4): 1197-1229.

Gourinchas, PO, T Philippon and D Vayanos (2016), “The Greek disaster: an post-mortem»,, August 5.

Micossi, S (2020), “Managing post-Covid sovereign debt within the euro space»,, October 20.

Xafa, M (2014), “Classes discovered from Greek debt restructuring in 2012 ”,, June 25.

Finish Notes

1 See Micossi (2020) on the influence of the pandemic on euro space money owed and on the administration of upper debt after the pandemic. Clearly, going through increased debt isn’t just an issue for Greece.

2 For the euro space disaster and its penalties, see Baldwin and Giavazzi (2015). For Greece earlier than and after the euro, see Alogoskoufis (2021), on which this text relies.

3 See Xafa (2014) for an evaluation of the small print of Greek debt restructuring.

4 Blanchard (2019) addresses the theoretical problems with managing public debt with low rates of interest. Bartsch et al. (2020) focus on the mixture of world fiscal and financial insurance policies after the pandemic.

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