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Thesis & Antithesis

A critical perspective on energy, international politics & current affairs

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Location: Washington, D.C.

greekdefaultwatch@gmail.com Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.

14 May 2010

Can Greece Avoid Default?

A few days ago, the IMF published its assessment on Greece’s request for stand-by arrangement. Reading it makes me wonder if Greece can possibly avoid default.

Greece started the crisis with a public debt level of 115% of GDP (given the opacity of data, Eurostat may raise this by five to seven points). The IMF’s baseline projection shows debt rising to 149% of GDP by 2013 and then declining to 120% of GDP by 2020. This baseline projection, however, is bracketed by a sensitivity analysis that ranges in the best case scenario from 80% (if GDP growth is higher by one percentage point) to a worst case scenario of 175% (if higher deflation persists from 2010 to 2012).

What this means is that even in the IMF’s most optimist scenario, debt does not reach its 2009 levels until 2016; in the baseline scenario, 2020 debt is still above 2010 levels. Obviously, when looking at the risk of default, initial position (debt level) matters as much as trajectory (deficits), so looking at the absolute debt level is not enough. Even so, it is worth pointing out that, at best, it will take Greece seven years to reach its current debt level, which is already unsustainable. This is not a good start.

Repayment indicators confirm this negative picture. By 2015, external debt service will take up 26.4% of GDP, up from 13.8% in 2010. It would also require all the country’s exports just to service external debt (95.4%). Meanwhile, external public debt service would equal 69.5% of central government revenue.

The IMF notes that these figures “underscore the scale of market access that needs to be secured soon after the end of the program.” Put otherwise, Greece will avoid default only if it can access market funds and roll over debt at a time when its debt-to-GDP ratio will be at its peak (2013) and much higher than in 2010. Again not an encouraging sign.