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

54 Pages Posted: 6 Apr 2017

See all articles by Jeromin Zettelmeyer

Jeromin Zettelmeyer

Peter G. Peterson Institute for International Economics; CEPR

Eike Kreplin

Federal Ministry for Economic Affairs and Energy

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics; CEPR

Date Written: April 4, 2017

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.

Keywords: Greece, Sovereign Debt, Debt Restructuring, Euro Crisis, European Stability Mechanism, European Financial Stability Facility

JEL Classification: F34, H63

Suggested Citation

Zettelmeyer, Jeromin and Kreplin, Eike and Panizza, Ugo, Does Greece Need More Official Debt Relief? If So, How Much? (April 4, 2017). Peterson Institute for International Economics Working Paper No. 17-6. Available at SSRN: https://ssrn.com/abstract=2946378 or http://dx.doi.org/10.2139/ssrn.2946378

Jeromin Zettelmeyer (Contact Author)

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

CEPR ( email )

London
United Kingdom

Eike Kreplin

Federal Ministry for Economic Affairs and Energy ( email )

Scharnhorststraße 34-37
Berlin, 10115
Germany

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics ( email )

Geneva Avenue de la Paix 11A
Geneva, 1202
Switzerland

CEPR ( email )

London
United Kingdom

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