An increasing number of individuals and agencies are acknowledging the necessity for a hair-cut on the Greek debt.
The National Institute for Economic and Social Research (NIESR) published a report on Tuesday that calls for the biggest Greek debt haircut that has been argued for yet.
“If the “troika” continue to insist on unrealistic fiscal targets, the Greek economy will remain in depression. According to our modelling, restoring debt sustainability requires a debt write-off equivalent to at least 55 per cent of GDP, higher than the IMF’s estimate of 30 per cent. More broadly, recent policy announcements among euro zone policymakers risk turning a monetary union into a mere fixed exchange rate system,” the press release for the study reads.
55 percent of the Greek GDP equates to 95 billion euros.
With increasing calls for a Greek debt reconstruction, the Greek government is gaining traction for its insistence that the debt is unsustainable and requires a haircut. Whether this will yield results is another matter.
Although Greek Prime Minister Alexis Tsipras has argued that his government was able to put the matter of the Greek debt on the negotiating table for the first time in the Greek bailout era, the debt issue will not be discussed in these imminent negotiations with creditors.
The German government has repeatedly dismissed any outright debt haircut for Greece, though German Chancellor Angela Merkel has been open to the potential of a discussion of some other kind of debt relief for Greece.
“The fiscal transfer from Euro Area members required to achieve this would represent 1 per cent of Euro Area GDP in one year,” the NIESR press release notes on the proposed 55 percent haircut. “As it would be spread over many years and across the membership, we argue the impact on other Euro Area members would be minimal, and that this fiscal transfer is necessary if Euro Area membership is to be maintained.
The study found that the major thorn for Greece’s economy will be the increases in VAT that Greece and its creditors have agreed on. The institute notes that VAT will further hamper consumption for the rest of 2015 and 2016.
Overall the Greek economy is looking at a tough year ahead.
“The economy is expected to contract sharply again this year and next, with GDP falling 3 per cent in 2015 and 2.3 per cent in 2016. We expect the recession to end in mid-2016. At this point the economy will be more than 30 per cent smaller than at its peak in 2007 and smaller than when it joined the Euro Area in 2001,” NIESR notes.
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