"Yet
whether Greece can pay the interest on its loans for now is not the issue.
Greece’s problem is that absent relief, the debt will remain huge. By
forfeiting commercial profit on its loans, the euro area is helping out, but
these cheap loans still add to the public debt. Japan is one of the few other countries to have amassed such high levels of debt in modern
times, and its “lost decade” is now in its 23rd year.
Until Greece’s nominal GDP growth, currently sharply negative, rises
above the interest rate it pays on its debts, these will go on increasing as a
proportion of the economy. This is simple arithmetic: Debt service costs add to
the debt, the numerator, faster than GDP, the denominator, rises."
"The optimistic view that low interest rates make debt relief
unnecessary follows in the same misguided vein. Greece is spending about 5
percent of GDP to service its debts, forcing it into the same vicious circle as
Japan (which spends only 2 percent of GDP on debt service) and Italy (5.4 percent of GDP).
This burden makes the task of turning Greece’s budget deficit into a surplus
hopeless and undermines future growth. Flat growth and no inflation mean that
the 3 percent interest Greece is paying on its debt remains too high to reverse
the vicious circle that has bedeviled the commission’s forecasts."
"(Charles Wyplosz is a professor of economics at the Graduate
Institute of International and Development Studies in Geneva.)"
