Is the Greek public debt actually "unpayable"?
By Scott Sumner
When it comes to public debt and deficits, I sometimes feel like people go to one extreme or the other. Japan has a public debt equal to about 250% of GDP, but many people wave it away as a minor inconvenience, even calling for more fiscal stimulus, despite the failure of previous efforts. In contrast, the Greek debt is often assumed to be obviously unpayable, despite being a far lower percentage of GDP. And maybe it is, but I’m not entirely convinced.
Of course my opinion does not matter—what does matter is the view of bond market participants. And they are becoming increasingly optimistic about Greek debt. Notice that the price has recently risen from below 60 to above 70 (cents on the euro):
The implied probability of default has fallen to well below 50%.
The FT notes that in some respects the Portuguese debt situation is even worse:
Portugal devotes a larger share of its economic output to debt service than Greece does now — about 4.0 per cent of gross domestic product versus 3.3 per cent according to data from the International Monetary Fund. (One wrinkle is that some Portuguese debt is funded by domestic creditors, while almost none of Greece’s is.) Depending on the magnitude of any official debt restructuring, Greek obligations could therefore end up considerably less risky than those issued by many other European countries. That in turn could imply a large decline in spreads and a continuation of the current bull market.
I’m no expert on Greek debt, but 3.3% of GDP is certainly not an unsustainable figure. So what exactly is the problem? Is it that the Greeks “can’t” pay the debt? Or that they “won’t” pay the debt? Any informed comments would be appreciated.
And for those who argue that the Greek debt problem is 100% due to their decision to join the euro, please explain to me what is causing Brazil’s debt problems. Last time I looked, Brazil had its own currency.
PS. Off topic, here’s what I said in February:
As nationalism is on the rise throughout the world, neoliberalism seems to be on the decline. My prediction is that this decline will eventually be seen as a myth. Neoliberalism is not going anywhere.
And here is what Ross Douthat wrote today, in response to the poor showing of Le Pen in the recent French election:
But in neither Europe nor America do post-liberal ideas look anywhere near fully ripe, and in both Europe and America there is a “first as tragedy, then as farce, then as online flamewar” quality to the way they’ve entered into political debates.
Nor do the pressures on the system from social fragmentation and economic stagnation yet look strong enough to overcome the stabilizing effects of the developed world’s great wealth, the risk aversion bred by age and habit, the fearful memories of what the last age of illiberalism wrought.
That’s the case, in brief, for betting on continued stasis, and for interpreting our moment’s perturbations — Trump, Comey and all — as pointing toward a real crisis for the West that still lurks a generation or more ahead.
Those final two paragraphs could have come right out of Tyler Cowen’s recent book.