Debt relief is not the solution for Greece

The notion that Greece cannot recover because of its crushing debt burden is superficially attractive. However it overlooks some basic facts and cannot explain why all the other peripheral countries which needed official support (Portugal, Ireland, Spain and Cyprus) are recovering.

The key to understanding Greece’s debt situation is that most of it is owed to the European institutions, which have already extended the maturity to over 30 years and are charging very low interest rates.

Expenditure on interest amounts now to 3.2 percent of GDP, which is much less than what the Greek government had to spend on interest before the crisis and before the troika. Interest expenditure is also lower for Greece than for Italy (3.9 percent of GDP) and much less than Portugal (4.2 percent of GDP).  Even the US government has to spend more on interest (3.8 percent of GDP) than the Greek government. But nobody argues that these countries need debt forgiveness to be able to grow.

An implicit conclusion from the fact of low interest costs is that debt forgiveness makes little difference. Assume the official European lenders were to forgive Greece 100 billion euro, a huge sum. What would change? This huge concession would save the Greek government a little over 1 billion euros in interest payments each year. Savings of this order of magnitude, less than 1 percent of GDP, are unlikely to make much of a difference.

In order to make debt forgiveness important one would need to argue that business will become much more willing to invest in the country because 30 to 40 years down the road there will be 100 billion euros less to be repaid (or refinanced). This is not realistic. Very few investments have such a long time horizon. Both Greek and foreign investors are reluctant to commit their capital to Greece because they fear the regulatory environment and the continuing political instability in the country, not because it has to pay some large sums two generations into the future.

The discussion about debt forgiveness is a dangerous distraction from the real problem, which is that Greek exports continue to stagnate. Wages have fallen by over 20 percent. Greek exporters should be experiencing a boom. The other peripheral countries are recovering because their exports are growing, spurring growth without the need for new capital from abroad. 

The Greek economy can grow again on a sustainable basis only if exports grow. Debt forgiveness will do nothing to solve this key problem.

* Daniel Gros is the director of the Center for European Policy Studies in Brussels.