Tag: sovereign debt






The report sounds some alarm bells for the global economy.













After Syriza’s dramatic victory in the Greek election, it is now seeking to pursue its manifesto promises of renegotiating the terms of Greece’s bailout and bringing an end to austerity policies.

The bailout of €240bn largely involved debt restructuring to give Greeks more time to pay. A ‘haircut’ (reduction) on privately held bonds, estimated to be somewhere between €50bn and €110bn, was more than offset by an increase of €130bn in loans granted by official creditors.

The terms of the bailout negotiated with the ‘Troika’ of the EU Commission, the ECB and the IMF, had forced the previous Greek government to make substantial fiscal adjustments. These have included large-scale cuts in government expenditure (including public-sector wages), increases in taxes, charges and fares, and selling state assets through an extensive programme of privatisation.

Although Greece is now regarded as having achieved a structural budget surplus (a surplus when the economy is operating at potential output: i.e. with a zero output gap), the austerity policies and a decline in inward investment have dampened the economy so much that, until last year, the actual budget deficit and public-sector debt continued to rise as tax revenues plummeted.

Since 2007, GDP has fallen by nearly 27% and the unemployment rate is around 26%. The fall in GDP has made the achievement of a reduction in the debt/GDP ratio that much harder. General government debt has risen from 103% of GDP in 2007 to 176% in 2014, and the budget deficit, although having peaked at 12.2% of GDP in 2013, has only been brought down through huge cuts.

As a report to the European Parliament from the Economic Governance Support Unit argues on page 27:

With less front-loaded fiscal adjustment, the EU-IMF financing envelope for Greece would have needed to expand, in what is already the largest financial assistance programme in percent of GDP in recent global history. On the other hand, a less rapid fiscal adjustment may have helped to preserve some of the productive capacity that, in the course of the adjustment, was destroyed.

The new government, although pledging not to default on debt, is insistent on renegotiating the debt and wants to achieve a high level of rescheduling and debt forgiveness. As the new Prime Minister, Alexis Tsipras, says:

On existing loans, we demand repayment terms that do not cause recession and do not push the people to more despair and poverty. We are not asking for new loans; we cannot keep adding debt to the mountain.

But, just as the Greek government is insistent on renegotiating its debt, so the German government and others in the EU are insisting that Greece sticks to the terms of the bailout and carries on with its current programme of debt reduction. Another haircut, they maintain, is out of the question.

We must wait to see how the negotiations play out. We are in the realms of game theory with various possible threats and promises on either side. It will be interesting to how these threats and promises are deployed.

New Leader in Greece Now Faces Creditors New York Times, Liz Alderman (26/1/15)
Syriza’s historic win puts Greece on collision course with Europe The Guardian, Ian Traynor and Helena Smith (26/1/15)
Greece Q&A: what now for Syriza and EU austerity? The Guardian, Phillip Inman (26/1/15)
Greek elections: Syriza gives eurozone economic headache BBC News, Prof Dimitri Mardas (26/1/15)
How a Syriza government would approach the eurozone The Telegraph, Andrew Lilico (19/1/15)
Australian economists urge Greek debt forgiveness as Syriza election win looks likely ABC News, Michael Janda (26/1/15)
Will Syriza win rock the global economy? CBS News, Nick Barnets (26/1/15)
Syriza should ignore calls to be responsible Irish Times. Paul Krugman (27/1/15)
Syriza Victory in Greek Election Roils European Debate Over Austerity Wall Street Journal, Marcus Walker (25/1/14)
Greece markets hit by debt default fears BBC News (28/1/15)
Why Europe Will Cave to Greece Bloomberg, Clive Crook (29/1/15)
Greece and the euro: Take the money and run The Economist, Buttonwood (28/1/15)
Tanking markets send dire warning to Greece’s new government Fortune, Geoffrey Smith (28/1/15)
The biggest debt write-offs in the history of the world The Telegraph, Mehreen Khan (2/2/15)


  1. Why has Greek debt continued to rise despite extremely tight fiscal policy?
  2. How is the structural deficit defined? What difficulties arise in trying to measure its size?
  3. Would there have been any way of substantially reducing the Greek budget deficit without driving Greece into a deep recession?
  4. What are the arguments for and against cancelling a large proportion of Greek debt? Is there a moral hazard involved here?
  5. Will the recently announced ECB quantitative easing programme help to reduce Greece’s debt?
  6. Are negotiations about debt forgiveness a zero sum game? Explain.
  7. What are the likely impacts of the Syriza victory on the global economy?

‘Deflation could be replacing debt as the main problem – and there’s nothing to suggest the ECB is up to the job.’ So begins the linked article below by Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley.

The good news in this is that worries about debt in eurozone countries are gradually receding. Indeed, this week Ireland officially ended its reliance on a bailout (of €67.5 billion) from the EU and IMF and regained financial sovereignty (see also).

The bad news is that this does not mark the end of austerity. Indeed, many eurozone countries could get stuck in a deflationary trap, with austerity policies continuing to depress aggregate demand. Eurozone inflation is less than 1% and falling. Broad money supply growth is now below that of the US dollar, the yen and sterling (see chart: click here for a PowerPoint).

The ECB has been far more cautious than central banks in other countries in acting to prevent recession and deflation. Unlike the USA, Japan and the UK, which have all engaged in extensive quantitative easing, the ECB had been reluctant to do so for fear of upsetting German opinion and taking the pressure off southern European countries to reform.

But as Eichengreen points out, the dangers of inaction could be much greater. What is more, quantitative easing is not the only option. The ECB could copy the UK approach of ‘funding for lending’ – not for housing, but for business.

Europe’s economic crisis could be mutating again The Guardian, Barry Eichengreen (10/12/13)


  1. What problems are created by falling prices?
  2. What effect would deflation have on debt and the difficulties in repaying that debt?
  3. What measures have already been adopted by the ECB to stimulate the eurozone economy? (Search previous articles on this site.)
  4. Why have such measures proved inadequate?
  5. What alternative policies are open to the ECB?
  6. What are the arguments for the ECB being given a higher inflation target (such as 3 or 4%)?
  7. What are the arguments for and against relaxing fiscal austerity in the eurozone at the current time?








Press release


  6. What are the risks associated with the OMT programme?







ECB information on OMOs
Open Market Operations ECB


  1. Explain how longer-term refinancing operations work.