Monday, May 17, 2010

A Default by Greece: Why and When?

by Jacob Funk Kirkegaard

Peterson Institute for International Economics
May 16, 2010

The $1 trillion rescue of the eurozone, aimed at averting a spread of contagion from Greece, did nothing to help the Greeks address their underlying and unsustainable fiscal situation. Greece is insolvent and needs to lower its total debt burden before 2012.

As I wrote earlier, the IMF has published its detailed economic analysis [pdf] of the Greek restructuring program, highlighting the substantial risks even under the IMF’s own somewhat optimistic economic assumptions. The IMF’s numbers indicate, for example, that even with the bailout package from the eurozone and the Fund, Greece is expected to cover part of its public financing need through a rollover of short-term debt in the private financial markets as soon as next month. Moreover, the IMF also envisions that Greece will be able to roll over long-term debt as soon as Q1 2012, at a time when Greece is expected to have a total debt burden of 145 percent of GDP. These steps will almost certainly prove impossible at low interest rates necessary for Greece to keep its primary deficit from exploding. The IMF itself assumes in its baseline scenario a 1 percent primary surplus in 2012 and total Greek interest payments of 7.5 percent of GDP—i.e., an implied cost of refinancing of 5 percent or so for 145 percent of GDP of debt.


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