When it comes to public debt and deficits, I sometimes feel like people go to one extreme or the other. Japan has a public debt equal to about 250% of GDP, but many people wave it away as a minor…
When it comes to public debt and deficits, I sometimes feel like people go to one extreme or the other. Japan has a public debt equal to about 250% of GDP, but many people wave it away as a minor inconvenience, even calling for more fiscal stimulus, despite the failure of previous efforts. In contrast, the Greek debt is often assumed to be obviously unpayable, despite being a far lower percentage of GDP. And maybe it is, but I’m not entirely convinced.
Of course my opinion does not matter—what does matter is the view of bond market participants. And they are becoming increasingly optimistic about Greek debt. Notice that the price has recently risen from below 60 to above 70 (cents on the euro) :
The implied probability of default has fallen to well below 50%.
The FT notes that in some respects the Portuguese debt situation is even worse: Portugal devotes a larger share of its economic output to debt service than Greece does now — about 4.0 per cent of gross domestic product versus 3.3 per cent according to data from the International Monetary Fund. (One wrinkle is that some Portuguese debt is funded by domestic creditors, while almost none of Greece’s is.) Depending on the magnitude of any official debt restructuring, Greek obligations could therefore end up considerably less risky than those issued by many other European countries.
