Debt cut must come with reform

If Greece is to exit its financial crisis, it will require a restructuring of the national debt combined with substantial reforms, according to the Parliamentary Budget Office, which warned on Wednesday in its intermediate report on the Greek debt that restructuring alone is not the right recipe.

Titled “The Debt Trap,” the report, presented on Wednesday by PBO head Panagiotis Liargovas, stresses that “a debt restructuring by itself, without some deep reforms, would not help. In a few years’ time Greece would again be on the razor’s edge. Therefore Greece will have to continue with reforms in crucial sectors such as justice and combating corruption and tax evasion, and by improving state mechanism operation and governance. Only in this way will it ensure that it does not revert to a bankruptcy situation.”

The Parliamentary Budget Office’s economists have also recorded the course of the Greek debt since the bailout process began in 2010, and the reasons the country has still not managed to bring it down. The report focuses on investment reduction, enterprises’ access to financing, and political uncertainty.

“While Greece has managed to reduce its fiscal deficit, and in spite of the PSI haircut in 2012, the country is already in its seventh year of recession, gross domestic product has shrunk by about 25 percent, the debt has jumped to 175 percent of GDP, and the unemployment rate is particularly high,” the report reads.

It added that, “at the same time, investments – which are absolutely necessary for the imposition of a new economic production model – have diminished significantly, and the access of corporations to funds is particularly problematic. This dismal situation also increases uncertainty (on a political and social level), generating a vicious cycle.”

The report’s authors estimate that Greece has been trapped in a “self-feeding recessionary spiral,” which they attribute to the excessively high national debt that affects key growth parameters, and the uncertainty as a result of the debt crisis and the low quality of the country’s institutions.