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Expect more Greek debt writedowns

Ben Chu

Greek+Riots+Continue+Unions+Hold+General+Strike+3lgMYLCh530l 150x150 Expect more Greek debt writedownsGreece will get its debt forgiveness, as part of the deal struck in the early hours. Angela Merkel and Nicolas Sarkozy leaned on the banks and forced an agreement.

But I seriously doubt this is the last time that Greek creditors will need to take a hit.

The euro summit statement says that, as a result of the deal, the Greek debt to GDP ratio will come down to 120% by 2020.

The calculation of Ken Rogoff and Carmen Reinhart, that countries can’t really grow when debt to GDP ratios breach 90 per cent of GDP can be debated. Japan is still stumbling along with a debt/GDP ratio of around 233%. Advanced economies that print their own money probably have more leeway.

But does anyone really believe Greece is among those lucky nations that can cope with a debt burden on this scale?

And there’s another problem.

The Troika’s “strictly confidential” analysis of Greece’s austerity programme notes that:

“The situation in Greece has taken a turn for the worse, with the economy increasingly adjusting through recession and related wage-price channels, rather than through structural reform-driven increases in productivity.”

In other words, massive austerity is killing, not curing, the Greek economy, despite what the IMF and the Germans predicted.

Put the two together – an unsustainable debt burden and poor prospects for growth – and its hard to avoid the conclusion that Greece’s creditors will be asked to write off more debt in the near future.

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