What an Interest Payment Moratorium Could Do for Greece

Michael Stephens | January 23, 2015

After a record-setting 23 straight quarters of shrinking GDP, the Greek economy was less awful in 2014, and an economic recovery of sorts might finally be under way. However, the Levy Institute’s latest projections (which are generated using a stock-flow consistent macroeconomic model tailored to Greece) indicate that Greece still faces years of anemic growth if it continues its current policies. Given the severity of the economic wounds inflicted on that country, a recovery led by market forces alone — that is, without any fiscal stimulus — likely means another decade or more before Greece climbs back to its precrisis levels of output and employment.

In their latest report, Dimitri Papadimitriou, Michalis Nikiforos, and Gennaro Zezza observe that median income in Greece fell by 30 percent between 2010 and 2013, real GDP is now down to where it was in 2001, and the largest share of the unemployed have been out of work for a year or more. Carrying on with the status quo is no longer tenable — and looks very likely to be overturned in the next election.

Using their stock-flow model for Greece, Papadimitriou, Nikiforos, and Zezza put together projections for three alternative policy scenarios: (1) a “New Deal” program of public investment and direct job creation funded by EU transfers; (2) a suspension of interest payments on debt held by public sector institutions (debt held by the private sector would continue to be serviced), with the amount of the suspended payments redirected to targeted public investments or direct job creation; (3) a combination of (1) and (2). Here’s what those alternative policy routes would do for real GDP growth in the next few years, compared to the baseline (status quo):

Real GDP Greece_Three Scenarios

(A more detailed breakdown of the results can be found below the fold.)

As the authors point out, these ideas aren’t exactly without precedent (as the leaders of one particular country with loud objections should know very well):

These policies are not new. They are identical to those implemented in Germany after Word War II, which included a Marshall Plan loan that was never repaid, the suspension of interest payments on the country’s enormous sovereign debt, and, finally, a significant write-down of public debt.

Read the rest here: “Is Greece Heading for a Recovery?” (pdf)

Greece_Real Growth and Financial Balances Under Alt Scenarios

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