The Greek debt spreadsheet
How fabulous is this spreadsheet? It allows you to take the official Greek assumptions of what’s going to happen with respect to its fiscal situation over the next few years, and replace them with anything you like.
Play around with anything in the orange cells, except for the ones saying “Nominal GDP growth”: that’s just the sum of the two rows above. It’s pretty easy to come up with some assumptions which show Greece’s debt-to-GDP ratio flattening out at somewhere north of 127%, instead of peaking at 120.6% and then falling to 113%:
Do let me know what kind of results you get. Reuters’s own Brian Love has run a bunch of numbers, including seeing real GDP fall by 3% in 2010, 7% in 2011, and 1% in 2012, before seeing a 3% rebound in 2013. (Those are numbers he got from Simon Johnson.) In that case Greece’s debt-to-GDP ratio rapidly gets higher than 135%, even before you take into account the fact that its borrowing costs would surely be rising sharply at the same time. Put in a steady 8% interest rate for its debt service, and the debt-to-GDP ratio can reach 150% quite easily:
Note that the chart above even assumes that Greece manages to run a primary surplus in 2012 and 2013 — that, before interest payments, it will be spending less than its tax revenues. Even at the end of an incredibly brutal recession. Realistically, the higher the negative numbers on the second line, the higher the negative numbers on the first line as well. That’s all you really need for a debt spiral: you don’t even need the interest rate on your debt to get crazily out of hand.
The stakes, then, could barely be higher. Either Greece manages to implement its current plan, or it comes very close to spiraling out of control into devaluation and/or default. Maybe that’s why the EU isn’t insisting on high levels of conditionality in its rescue package: it knows that the Greeks themselves have every incentive to get this right. Which doesn’t, of course, mean that they’ll succeed.