Syriza’s win in the Greek elections has focused global attention on the country’s problematic public finances. But one of the myths about Greece is that is has a debt problem at all
Ahead of the Greek election, many articles in the international press gave centre stage to the debt issue. Yet the election was, in one key respect, a travesty of democratic process. Electors were given a choice between political parties and policies, but the choice was be based on a lie. The choice was which of the competing parties would deal best with Greece’s huge and unsustainable debt. The lie was that Greece has huge and unsustainable debt. Had it been recognised that Greece’s net debt is actually less than 20% of GDP, imagine how different the election, and the competing policies, would have been. The policies would have addressed how the Greek economy could be made to function more effectively, and how the public finances should be managed.
First, the facts. Greece’s gross debt is widely reported as being 175% of GDP. This is a number that Klaus Regling, managing director of the European Stability Mechanism, describes as ‘meaningless’, and it is. Recent articles in the New York Times and Forbes recognise that the accounting for Greek debt has been, well, Greek accounting. Measured according to International Public Sector Accounting Standards (IPSAS), the gross debt of Greece is 68% of GDP. The difference reflects, primarily, the historically unprecedented, huge effective debt reduction brought about by the 2011 and 2012 debt restructurings, which pushed debt maturities far out into the future and significantly reduced interest rates. In reporting the lower number for gross debt, international accounting standards reflect both economic reality and the time value of money, a principle that has been recognised at least since the 13th century.
But gross debt is not the best measure of debt burden or fiscal strength. Governments with strong track records in fiscal management regard net debt as the better measure, and Greece’s net debt is 18%. The difference between 68% and 18% reflects financial assets of the Greek government. And 18% means that Greece’s debt burden is markedly lower than that of most European governments.
So the election has been a travesty – sound and fury about a problem that does not exist. Now the election is over, it is time to face the facts. Greece does not have a debt problem, but that does not mean it does not have a problem. The new Syriza-led government must get a clear view of its real situation, and determine a path forward on that basis. That path should include negotiations with the troika which are based on the real numbers. It means reform, and certainly reform of Greece’s accounting, budgeting and financial management systems. It almost certainly implies a lesser need for austerity, given that the debt problem is relatively small. The debt relief Greece has already received give it enough breathing space to address the real problems facing its economy. Key amongst those is building institutions of government that create confidence and trust on the part of citizens and investors.
