Terry McDonald expect challenging future in Greece
As explained in this Reuters article, the Greek government has officially announced the resolution of its debts to the European Stability Mechanism. While this sounds like a positive development, and is certainly being framed as such in Prime Minister Alex Tsipras’ proclamation of fiscal sovereignty, where he will “symbolically make the speech on Ithaca, the island where Odysseus returned home from the Trojan war after a 10-year voyage recounted by Greek classical poet Homer.”
The problem is, Odysseus did not return home to 180% of GDP in state debt, with interest compounding. The government and partners may be haling fiscal sovereignty, but the Greek economy – shrunk by a quarter during the crisis and its prolonged aftermath – still has Damoclean debt looking at it for the generations to come.
Greece has already returned to primary budget surplus – meaning that the deficit has been eliminated except for interest payments. But it is these interest payments that have and will drag the Greek economy down for decades. Extending maturities and extending new loans is not going to eliminate debt burdens. Imposed mandatory primary surpluses until 2060 is hardly what most would consider full fiscal sovereignty – and the return to selling directly on the bond market is certainly a mixed blessing, as any market rumblings about Greece’s ability to meet its obligations will only drive up the cost of servicing said debt, opening another round of the vicious cycle that has plagued this situation from the outset.
Greece’s return to primary surplus, and commitment to stay there – is a meaningful step in securing a stable long-term economy for itself and its partners. A similar reduction in the debt burden it faces will likely be required for there to be any real expectation of full economic health, and a reduction in the resentment that left unchecked can undercut the European project.
19 August 2018
Illustration: Karstein Volle