Wednesday, August 12, 2015

Greek debt sustainability: The devil is in the tails

by Andrea Consiglio & Stavros A. Zenios


August 12, 2015

Some experts view Greek debt as sustainable, while others claim it is not sustainable. This column argues that the distinction between tactical and strategic debt sustainability can explain this difference of opinions. Moreover, strategic debt sustainability analysis should account for tail risk. This approach shows that Greek debt is highly unsustainable, but sustainability can be restored with a nominal haircut of 50%, interest rate concessions of 70%, or a rescheduling of debt to a weighted average maturity of 20 years. Greece and its creditors should ‘bet on the future’ and embrace debt relief.

Who is right?

Holding a national referendum on a highly technical document on debt sustainability is indicative of the confusion among Greek (and EU) politics in the midst of a never-ending crisis. It is also indicative of some confusion over what debt sustainability analysis tells us.

How could we have conflicting conclusions on the sustainability of Greek debt by credible analysts with access to the same data? For instance, Paul De Grauwe argues that the “Greek debt is sustainable” (De Grauwe 2015), whereas the recent IMF report finds that the “debt could not be considered sustainable” (IMF 2015).


No comments: