Financial Times
July 19, 2011
The Greek government is on the knife-edge of solvency. Public debt is estimated to be around 160 per cent of the country’s gross domestic product, of which around three quarters is owed to foreign creditors. We cannot be sure whether it can service its debts within the boundaries of political, social, and economic stability. But following from my previous article, I believe a route to Greek solvency is possible.
To repay its debts, the Greek government must make two net resource transfers: from Greece to foreign creditors, and from the budget to all private creditors, domestic and foreign. Greece can probably sustain payments abroad of around two to three per cent of GDP per year, but larger transfers could trigger a political and social explosion. Internal payments are less explosive politically and a primary budget surplus can probably be sustained at around three to four per cent of GDP per year.
“Solvency” is therefore not a precise economic condition, but a reflection of long-term economic, social, and political conditions. Greece is close to the edge and, without a prospect of recovering economic growth and employment, even the limits just described will be unmanageable.
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