Wednesday, March 21, 2012

Realism On Greece

Politicians and the legacy media are crowing about the plan to address Greece’s persistent problems (even though much of the plan amounts to making official the write-downs of Greek bonds that private investors have already booked).

Here’s Luigi Zingales, a big-time international finance researcher from the University of Chicago (he’s one of those MIT graduates from my January post that’s networked at the top levels):

On the face of it, the "voluntary" arrangement with creditors might appear to have been a big success. …

But, despite these trumpeted results, the reality is much harsher. Even with the latest deal … the debt ratio would exceed 130% before stabilizing at 120% in 2020.

But even this reduced level is not sustainable. … the government would need to run an annual 2.6%-of-GDP primary budget surplus (the fiscal balance minus debt-service costs) for the next 30 years just to keep the debt burden stable.

To put that task in perspective … To reduce the debt-to-GDP ratio to 70%, Greece would have to maintain an average primary surplus of 4% for the next 30 years, a level that it has temporarily achieved in only four of the last 25 years.

I’m a bit harsher on Greece, but it’s consistent with the view I’ve given in class that anyone in their right mind should expect Greece to be a recurring problem.

Read the whole thing in the “Notable and Quotable” section of The Wall Street Journal’s March 19 op-ed page.

No comments:

Post a Comment