Will Greece have to ask for additional debt relief?

Will Greece have to ask for additional debt relief?

Greece’s debt-to-GDP continues to rise and is now at 175 percent. Simply put, the Euro has proven too expensive for Greece.

Like Sisyphus pushing the boulder up the mountain, in a never-ending process of toil and sweat, Greece still struggles with a tremendous pile of debt. The maturities and payback times are larger now than they were in 2012, since the average maturity of Greek debt was extended from about six years to 16 years, thanks to a combined result of private sector restructuring and new loans from the European Stability Mechanism. The annual interest rate that Greece has to pay on new loans is only about 3 percent.

However, the debt-to-GDP ratio is at 175 percent of GDP and rising, while Greece has had 30 percent of its GDP wiped out within the past six years – the latter is a development comparable to that of the U.S. during the Great Depression. Putting this into context, the Troika finds any debt-to-GDP ratio over 120 percent is unsustainable.

Sure, the current account is nearly balanced now, from a hefty deficit of €35 billion in 2008. But, as Macropolis, a Greek platform for economic and political analysis, puts it; “the majority of the correction of the trade deficit is covered by a collapse in imports due to domestic demand almost evaporating after three years of austerity and disposable incomes plummeting by almost a third.”

The problem is by no means dealt with by simply plotting it on a longer timeline. When one of the rates for debt and GDP (which define the debt-to-GDP ratio) keeps growing at a faster rate than the other, it doesn’t really matter how long you look at it; the faster growing will outpace the other. For now, Greek debt keeps rising, while Greek GDP growth has been negative since 2008 and was at -6.4 percent in 2012. It is a no-brainer that the debt-to-GDP ratio has increased and continues to do so despite efforts at streamlining the Greek economy by forcing labour costs and prices down.

Greek labour costs and prices (left panel) and real effective exchange rate (right panel)

Greek labour costs and prices (left panel) and real effective exchange rate (right panel)

Whereas labour costs have indeed collapsed, as shown in the charts above, prices are sticky because goods are much more mobile across borders than labour, especially in heterogeneous Europe. In the absence of a currency devaluation, which is impossible with the Euro in place, internal devaluation relies on suppressed domestic demand in trying to reduce imports, and thus improve the trade balance.

Wages are slashed, leading to higher unemployment and lower disposable income for households and individuals to spend. That in turn gives employers a very strong bargaining position, as people get increasingly desperate for jobs, such that the wage decreases even more. The result? A sinking economy with consecutive years of negative growth, plummeting wages and skyrocketing unemployment figures.

Development of GDP and unemployment rate in Greece 2008 – 2014* (IMF)










GDP, constant prices Percent change








Unemployment rate Percent change









The main problem is the Euro. In a paper published by Morgan Stanley, the fair price of the Euro for the various member states clearly shows that some get a good bargain while others are left in a shoddy situation with an overpriced currency in a mismatched European economic area.

Greek labour cost and price

Comparison of the fair value of the Euro for EMU countries, based on analysis from Morgan Stanley

As the figure shows, Morgan Stanley’s analysts put the fair value of the Euro against the dollar for the Greek economy at just over $1. For Germany, this is 1.53 and the Euro currently trades against the dollar at 1.36. That yields a difference between Greece and Germany at about 43 percent while Greece needs the Euro to depreciate by 25 percent to have a fair chance of being competitive.

Greece (and several other European economies) continue to be part of a currency which is simply too expensive for them. Meanwhile, there seems to be very little sentiment in favour of relief for debt-straddled Greece. German Chancellor Angela Merkel flatly refuses it, maintaining that Germany will back the bailouts if and only if Greece sticks to its targets and austerity measures.

Whether it is fear of contagion, affecting other countries with worryingly large debt burdens, or one of moral hazard, in the sense that nations will go carefree on public spending sprees, is hard to say, but the last word has not been said. Europe still has a number of difficult problems to address, and time alone will not solve them.

Categories: Economics, Europe

About Author

Mikala Sorenson

Mikala Sorensen is an Economist with regional expertise in Europe. She holds a first class honours degree in Philosophy, Politics and Economics from the University of York and a Masters in Economics from the University of Copenhagen. Having interned at the Danish OECD-delegation in Paris and currently working at the Danish Ministry of Finance, she specialises in politics and macroeconomics. Analysis for GRI is an expression of her own views.