Sustainability of Greek Public Debt

by William R. Cline

Peterson Institute for International Economics
Policy Brief 11-15
October 2011

On July 21, 2011, the heads of government of the euro area announced a new plan to address the Greek debt crisis. This policy brief presents a simulation exercise that examines whether the new arrangements are likely to provide a sustainable solution. The analysis focuses on four key measures: gross debt relative to GDP; net debt relative to GDP; net interest payments relative to GDP; and amortization of medium- and long-term debt coming due during the year in question, relative to GDP. The new Greek package shows prospective future progress on all four measures, and Greek debt looks much more sustainable after the package than before. In the central baseline through 2020 after the July 2011 package, gross debt peaks at 175 percent of GDP in 2012, then falls to 113 percent by 2020; net debt falls from 121 percent of GDP in 2011 to 69 percent by 2020; purchase of private-sector involvement (PSI) collateral boosts assets from €76 billion in 2010 to about €150 billion by 2015; the interest burden falls from 7.2 percent of GDP in 2011 to 5.2 percent by 2020; amortization falls from 12 percent of GDP in 2011 to 6.5 percent by 2015, 0.5 percent in 2020; the primary surplus rises from –0.8 percent of GDP in 2011 to +6.4 percent by 2014 and after; and the average interest rate on public debt plateaus in a manageable range of about 4.5 percent. These results suggest that Greece can manage its sovereign debt under the new package so long as it meets the fiscal adjustment targets. So far the evidence is that Greek political leaders are willing to take the extensive and unpopular measures necessary to do so.

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