The Farcical Tragicomedy Of The "Sustainable" Greek Debt/GDP "Denominator"

Somewhere in the deep bowels of Brussels bureaucratic labyrinth, a murder of European ministers (as they most closely approximate the Corvus Corvidae Genus/Species) currently sitting down and trying to come with a solution that "fixed" Greece. It will do no such thing: in fact, all that the Eurogroup is doing today, in addition to trying to do with it already did twice before without success, is to find a socially palatable way to disclose a policy that will see Greek debt haircut by a very modest amount ("unmodest" enough to be considered prohibited under Article 123, but who is counting any more), either through an outright haircut of official sector debt (something Germany has repeatedly said "9" to), or through a debt buyback of existing private debt (something which will have no impact now that the debt has soared following a long-running political leak which has allowed bondholders to trade accordingly). Aside for applying lipstick on a dead pig, what Europe is doing is focusing on the numerator in the all critical debt/GDP ratio. Sadly, this is just half of what Europe should be focusing on. The other half? Why GDP of course. Because it is here that things get truly hilarious.

As can be seen in the tables below which summarize the projections for the Greek economy, either with or without policy implementation that sees a debt cut, is that the country will halt that collapse in its GDP (which dropped more than 7% in the last quarter) and not only post its first rise in 2014, but grow by 3.9% in 2015, and over 4% each year after. Just as laughable a scenario face the Greek primary surplus: the country, where striking people go on strike from striking to really emphasize their point, and in which virtually no tax revenues are being created, is expected to see its budget deficit flatline in 2013 and somehow rise to a surplus well over 4% of GDP each year. Laughable? yes. Idiotic? Absolutely. Because if Greece achieves this, it will be the first country to have not only grown its GDP, but achieved a primary surplus in a time of deleveraging, because under Keynesian voodoo rules, a country's GDP can only grow if its debt grows in parallel. Which is why what will likely happen is that in 2022, when the latest set of Troika projections expect Greek GDP to be EUR255 billion, leading to a 115.4% debt/GDP ratio, that real Greek GDP one decade from today will be lucky if it has triple digits in it. But assuming a GDP flatline, which at least passably possible, for the Greek economy over the next 10 years, then debt/GDP for the doomed nation will be.... 160% in 2020!

  • In summary: Greek 2022 debt/GDP will be 115% if and only if Greece not only cuts its debt by EUR50 billion, but manages to grow its GDP by EUR60 billion.

One can see why the IMF wants to have nothing to do with this country which has long since become a parody of itself.

The tables showing Greek projections with and without a policy change:

And the full take of JPM's David Mackie:

The Euro group will meet for the third time today to try and resolve the Greece situation. The key issue revolves around medium term debt sustainability rather than near term financing issues. The need to agree on the medium term debt sustainability issue is about keeping the IMF on board the program, rather than sorting out the situation once and for all. Near term financing issues look likely to be dealt with via higher T-bill issuance.


The Euro group could reach a decision today if it is prepared to do a bit of everything. The first table below shows the situation out to 2022 without any areawide policy change. In this situation, Greek debt would be 147.9% of GDP in 2020 and 135.2% of GDP in 2022. The second table shows the impact of three changes: first, a 90bp reduction on the borrowing costs on the Greek loan facility; second, a €14bn EFSF loan to buy back €35bn of market debt; and third, the transfer of SMP profits to Greece. With these policy changes, Greek debt would be 130.6% of GDP in 2020 and 115.4% of GDP in 2022.


If the Euro group is able to agree on this, the next tranche of the second program will be released and the IMF will likely remain on board. But, the big question of a restructuring of official loans will still need to be answered at some point in the future. The debt dynamics in the tables below still assume ambitious fiscal numbers for Greece and solid nominal GDP growth. Greece is assumed to be able to run a primary surplus of 4.5% of GDP on an indefinite basis, and nominal GDP growth is assumed to average over 4%.