Euro area still in denial about Greek failure – AllianceBernstein
The latest delay by euro area finance ministers on approving funding to Greece reflects deep disagreement about how to reduce current unsustainable debt levels, according to Darren Williams, senior European economist at AllianceBernstein.
“Until the euro area addresses this key issue, caused by the failure of the Greek programme, the threat of a disorderly exit from the euro area will remain real,” he said.
Recalling the recent history of debt talks, he said that when the first Greek loan facility was agreed in May 2010, the economy was expected to contract by a cumulative 6.6% in 2010 and 2011, but to start growing again this year.
In fact, the Greek economy contracted by a cumulative 11.7% in 2010 and 2011, and official projections suggest it will shrink by a further 9.9% in 2012 and 2013.
“The irony is that the painful “cure” has made the malady worse,” said Williams. “Instead of government debt to GDP peaking at 150% in 2013, the government’s latest projections suggest it will top out at a staggering 192% of GDP in 2014.”
The main culprit has been the collapse in nominal GDP., he explained. The original programme assumed this would increase by 4.9% to €242bn in 2014, whereas the latest estimates suggest that it will fall to €183bn, nearly 25% lower than envisaged.
This collapse in the denominator has made it impossible for Greece to stabilize its debt-to-GDP ratio, even though the level of debt in nominal terms is expected to be lower than assumed in the original program: €350bn in 2014 compared with €359bn.
Against this backdrop, it’s hard to see how Greece will be able to reduce its debt-to-GDP ratio to the original target of 120% by 2020 (favoured by the IMF) or 2022 (favoured by euro-area finance ministers) without a second restructuring involving official sector write-offs.
“The problem is that euro-area governments, as the main creditors, are reluctant to agree to such a restructuring for fear of the public backlash that would undoubtedly unleash,” said Williams.
“As so often since the beginning of the sovereign-debt crisis, we believe the immediate crisis will be dealt with. But there is still no appetite for tackling the much more fundamental issue of debt sustainability. It’s high time for euro-area governments to admit that the Greek program isn’t working and look for a different approach.”