At the end of 2009, as Greek bondholders were beginning to worry about a possible debt crisis, Greece's central government debt stood at about €300 billion, roughly 130 percent of GDP. Its fiscal deficit for the same year had been over 15 percent of GDP. A few months later, Greece lost market access and entered an adjustment program, financed by the European Union and the International Monetary Fund (IMF), aimed at gradually eliminating its deficit and restoring the sustainability of Greece's public debts.
By 2016, Greece had achieved a small fiscal surplus. But its central government debt continued to rise—by about 10 percent in nominal terms, and much more dramatically as a share of GDP, before stabilizing at around 180 percent of GDP. This happened despite three successive economic adjustment and reform programs and several rounds of debt relief—including a 2012 bond restructuring that cut the face value of Greece's debt by €107 billion.
How was this possible? Because the collapse of the economy, which had started in 2008, accelerated during the first program (2010–12), and because fiscal deficits—although declining—remained high for most of the 2010–16 period. Why? The answer includes a strategic error, errors in carrying out the chosen strategy, and political and social upheaval.
First, Greece's bond restructuring came far too late. Rather than reducing Greece's debt burden upfront, the Greek government and its official creditors tried to tackle the debt problem by cutting the deficit as hard and quickly as possible. This drove the economy into a deep depression, which in turn made it much harder to reduce the deficit. It also meant that between the start of the first program and the 2012 restructuring, about €45 billion of Greek bonds were repaid in full, financed by official debt that burdens Greece today.
Second, mistakes were made in implementing the first and second programs. In addition to imposing austerity, these programs also attempted to stimulate growth by reforming markets and institutions. But these reforms were not properly implemented, or only with considerable delay.
Finally, political and social upheaval, arising out of the failure of the first and second programs and the pain that this inflicted on the Greek population, led to the 2015 stand-off between the Greek government and its official creditors—which nearly resulted in Greece's exit from the euro area. The economic costs of that stand-off were high, raising the deficit and delaying the recovery.
The implementation of the third program has exceeded expectations, and the Greek economy has finally started to recover. But Greece's debt remains unsustainable. In a recent PIIE Policy Brief, my coauthors and I argue that creditors should offer Greece year-by-year face value debt relief, conditional on maintaining primary surpluses above 1.5 percent of GDP beyond 2022. Without an agreement of this type, the next Greek debt crisis will be just a matter of time.
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