As Greece and its international lenders continue tense talks on reducing the Greek budget deficit, new data from the European Union on Monday underscored the potentially Sisyphean nature of such efforts. Some of the countries that have made the most progress in closing their budget gaps ? Greece, in particular ? have also had their overall debt loads actually get bigger as a percentage of the economy, according to data released by Eurostat, the European Union?s data agency.
A recent report from the International Monetary Fund, one of Greece?s international creditors, reached a similar conclusion. That helps explain why the IMF has started adopting a less austere stance toward debtor countries, even as countries like Germany continue to take a hard fiscal line, insisting that Athens stick to a program of lower spending and higher taxes.
Critics of the euro zone?s austerity push have argued it is counterproductive. But the new data provide perhaps the starkest, most objective picture yet of the mounting burdens shouldered by countries that have accepted bailouts, like Greece, Ireland and Portugal, as well as Spain, which may soon need to accept its own strings-attached European aid. The economies of all four countries have contracted sharply under the austerity measures ? Greece?s by one-fourth since 2009. But the size of the debts relative to economic output has soared. That raises serious questions about their ability to repay those obligations over time.
?If you want to make its debt burden sustainable, there will have to be some kind of debt forgiveness and restructuring,? J?rg Kr?mer, chief economist at Commerzbank in Frankfurt, said of Greece.
For now, the Greek government apparently sees little choice but to continue working out a 13.5-billion-euro ($17.6 billion) austerity package and changes to labour laws that its international creditors have demanded before releasing the next installment of bailout loans. Negotiations continued Monday in Athens with the creditors: the IMF, the ECB and the European Commission.
Many analysts, though, say the most diligent deficit reduction programmes would do little to bring down debt levels as long as economies are not growing and the interest rates that these countries pay on their debt remain high.
There have been varying causes for the debt spirals. Greece?s ratio of debt to gross domestic product has hit a new high of 170%, and Portugal?s has reached 120%. Both can blame high interest rates and deep recessions. But for Ireland, with a debt burden of 117% of GDP, and Spain, with a ratio of 90%, a big factor is heavy borrowing to bail out their failed banks.
The promise by the ECB to buy troubled countries? bonds, if requested, has reduced some of the short-term borrowing costs of these countries. But they are still much higher than the interest rates paid by the most creditworthy euro zone nations, like Germany.
