Wall Street Journal
February 18, 2012
The magic number in negotiations for a Greek bailout has become 120% in 2020.
That is the maximum ratio of Greece's government debt to its gross domestic product that the International Monetary Fund, the European Commission and the European Central Bank have deemed acceptable.
Greece and this trio of lenders have agreed that any larger ratio probably isn't sustainable: The nation isn't likely to be able to continue paying off its debt if it exceeds that benchmark at the decade's end.
But many economists say the 120% threshold isn't based on any particular economic principles. And the source of the figure isn't totally clear.
The threshold does provide a reachable target while indicating that other struggling European economies are safe from a debt squeeze. However, there are reasons to think Greece wouldn't be able to sustain a level that high—even if projections out to 2020 are accurate, unlike earlier, shorter-term projections of Greek debt that proved overly optimistic. Among the concerns: the possibility that austerity measures suppress Greece's economic growth, problems with the debt measure itself, and what it doesn't include.
The 120% target is a "sacrosanct European Union illusion," says Constantin Gurdgiev, an economist at Trinity College in Dublin. "I can't see any economics behind it."
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