Economic Policy Europe Public Finances and Financial Economics

Judy Asks: Can Debt Relief Save the Euro?

A selection of experts answer a new question from Judy Dempsey on the foreign and security policy challenges shaping Europe’s role in the world.

The question is not whether debt relief is needed, but how and when it will take place.

Almost one year after the Greek debt drama, which almost ended with Greece’s exit from the eurozone, the conflict between the Greek government and its European partners is again heating up. The bad news is that progress on Greek reforms is slow and painful. The good news is that as Greece has become increasingly isolated, the Greek crisis no longer seems a major threat to economic or political stability in the rest of Europe.

On the issue of debt relief: Greece’s public debt is close to 180 percent of GDP as of spring 2016 and likely to rise to close to 200 percent over the next two years. Although the Greek government has received very favorable conditions on servicing its debt, it is realistic that interest rates on Greek debt will rise to 5–6 percent during the next five years. This implies that overall debt servicing costs, including the repayment of the principal, could exceed 15 percent of Greek GDP, which is unsustainable.

The best solution will likely be to grant further debt relief in the form of an extended maturity and transformation of the debt, linking it to growth in Greece rather than in the eurozone area, conditional on the country successfully completing its third bailout program. In short, debt relief for Greece will not save the euro, but nor does it threaten it.

The other experts who answered the question are …more

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