The Greek government is on the knife-edge of solvency. Public debt is estimated to be around 160 per cent of the country’s gross domestic product, of which around three quarters is owed to foreign creditors. We cannot be sure whether it can service its debts within the boundaries of political, social, and economic stability. But I believe a route to Greek solvency is possible.
Greece’s ability to “pay down” its debts and restore long-term confidence in its solvency will depend on the future real interest rates it will have to pay – balanced against the real growth rate of its economy. If it is pushed too soon to the private capital markets it will face sky-high rates, if it is able to borrow at all. Insolvency and default would then become inevitable. The better approach is to lock in low long-term interest rates at the “safe” rate, close to the current German or French long-term borrowing rate. This could be achieved most directly through guarantees offered by the European Financial Stability Facility on Greece’s future borrowing.
There is a chance – a rather good one, I believe – that in the end Greece would prove able to repay its debts over the course of 20 years at lower interest rates established by the EFSF. It may be the last clear chance for Greece and Europe to avoid a potential calamity. It is an attempt well worth making.