Download Institutions I The timing was wrong?

SYMPOSIUM | Greece, Out of The Crisis: Debt-End
or Dead-End
Is there a ‘debt trap’ in the Greek
economy?
Panagiotis Liargovas
University of Peloponnese
& Greek Parliamentary Budget Office,
17 May, 2017
Webster Vienna Private University
What is the debt trap?
Short- run
Long-run
productive spending
Debt
Debt
or unproductive spending
Growth
unproductive spending
Public Deficits & Interest rates
Savings, investments, productivity
Growth
Previous empirical literature
• Some find a strong negative relationship
• Some argue that high debt affects growth
negatively only when the country’s quality of
institutions is low
• Some argue that the negative relation between
high debt and growth is valid only for
developing countries (but not for industrial
countries)
The main conclusion from previous
literature
There is no consensus about the
debt – growth relation, nor for the
tools that should be used for its
analysis; rather such a relation
seems to be affected by various
factors
The basic estimation equation
Yit = β0 + β1Χ1,it + β2Χ2,it + … + β15 Χ15,it +
β16Χ16,it +uit,
• The growth model is based on a conditional
convergence equation where real GDP per
capita is related with savings, investments,
population growth and technological level.
• Then, apart from the public debt, various other
independent variables - related to growth – are
added to the model.
Data and Methodology
The sample includes annual observations for the 28 EU
countries over the period 1995-2014 and data were collected
from AMECO.
We use a regression model using OLS, OLS for panel data
with random and fixed effects methods and also the GMM
model.
Also, two dependent variables were used: annual real GDP
per capita growth rate and cumulative 5-year nonoverlapping real GDP per capita growth rate.
Results – Graphical summary
Results
• For Greece the overhang debt reduces its real GDP
per capita growth rate by almost 3% (annually).
• If the primary surplus increases by 1%, the real
GDP per capita growth rate will increase by 0.32%.
• A positive statistically significant relation is found
for the TFP, for the participation in a monetary
union and for the Voice and Accountability.
Debt and private/public investments
in Greece(1995-2014, bn €)
During the crisis, public investments decreased by almost 50%, private
investments by 70% (from €49 bn in 2007 to €14 bn in 2014), thus
confirming findings of relevant empirical studies for the impact of debt
overhang to investments.
Debt and savings in Greece (19952014, bn €)
During the crisis, savings (annual) were reduced by 50%,
Debt and Total Factor Productivity in
Greece (1995-2014, bn €)
120.00
109.44
105.33
100.00
200.00
172.10
180.06
93.62
180.00
160.00
87.64
140.00
80.00
99.34
107.08
103.10
60.00
120.00
100.00
98.86
80.00
40.00
60.00
40.00
20.00
20.00
0.00
0.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
% GDP
Source: Ameco
TFP
During the crisis, TFP decreased
Debt
Conclusions
Greece is trapped in a selfreinforcing recession;
its high debt burden (that affects
key development factors), in
addition to uncertainty and low
institutional quality create a
vicious cycle.
Debt Laffer curve
when a country’s debt is on the “bad” side of the curve (right of
point B, Graph 5 ) an extensive debt haircut is in the benefit of
both the indebted country and of its creditors.
Conclusions
What does all this mean for Greece?
• the debt overhang constitutes a huge burden
for the Greek economy, hindering growth
prospects, thus a debt restructuring is
necessary.
• the necessity for the continuation of structural
reforms (related to productivity, State functions,
institutions) is also evident, so as to establish
the foundations for economic recovery.
Thank you for your attention!
DDA
We perform a debt sustainability
analysis (based on gross financing
needs, the methodology that the
institutions are using) following the
hypotheses of the institutions (surplus,
growth rate)

Growth Rates

Primary Surplus
2019 3%
2020 2,8%
2021 2%
2022 - 2029 1,5%
2030 - 2060 1,25%
2019 - 2028 3,5%
2029 - 2060 2%
Privatization revenues
€ 500 ml. Per year (till 2059)
Interest rates (scenarios)
1,5%
3%
6%
Debt evolution (%of GDP) with different interest rates
(1,5%, 3% and 6%)
1200
1000
800
600
400
200
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
2051
2052
2053
2054
2055
2056
2057
2058
2059
0
1,50%
3%
6%
Πηγή:ΟΔΔΗΧ
Due to its current high debt, restoring Greece’s access to bond markets
in 2018 is challenging. A Greek debt restructuring is necessary so that
Greece can escape from its debt trap.Also, keeping the GFNs under the
limit set does not ensure Greece’s debt sustainability.
Therefore
Even if Greece manages to restore market access
with a 3 per cent interest, that would be short-lived
as its debt will continue to increase at high rate
reaching 330% in 2060 (even if positive growth rates
are registered and primary surpluses are achieved).
As a result, investors will demand an even higher
interest, thus Greece will lose again access to market.
On the other hand, borrowing with very low rates
(close to 1.5%) can only be provided by the European
financing mechanism.
What are the solutions?
There are two options:
a) a debt haircut and,
b) an extension of principal and
interest payment and grace
periods (in essence, an indirect
debt restructuring)
How extensive a debt «haircut» should be?
We calculate the primary surpluses that Greece
can achieve. The GFNs include both amortization and interest.
We assume that principal is being refinanced
perpetually through markets. Thus, based on
Krugman’s argument what matters is interest
repayment (through the primary surplus) so that
Greece does not create new debt and remains
solvent.
How extensive a debt «haircut» should be?
In this context, we calculate the
primary surpluses that Greece can
achieve over a 20-year period (20192040) on a more realistic basis in
comparison to institutions’ projections
How extensive a debt «haircut» should be?
Based on these, it is estimated that Greece can
devote (on average) €5.12 bn per year for interest
payments so as not to create new debt. This
amounts (assuming that after a debt «haircut»
Greece could borrow at a 3 per cent rate) to a
total debt of €170 bn. Thus Greece’s debt should
be cut by €150 bn after which its debt/GDP ratio
will be reduced to 92%, a level that is being
considered sustainable (in the Eurozone, the
average debt/GDP ratio is 90.1% ).
Extending principal and interest payments
and grace periods
In this context, the IMF – which argues that the
Greek debt is unsustainable – proposes that
repayment of GLF, EFSF and ESM loans should be
extended till 2080 and interest should be fixed at
low levels (around 1.5%). According to IMF
projections, through the implementation of such
measures debt could reach 60% of GDP, while
GFNs at 19.5%.