Greece needs €100bn debt relief as permanent depression looms
Greece needs a debt write-down of almost €100bn if the country is to stand a chance of clawing its way out of a “prolonged and severe depression”, according to a leading think-tank.
In a stark analysis, the National Institute of Economic and Social Research (NIESR) laid bare the impact of VAT hikes and strict budget targets that it said could become “self-defeating”.
As Greek bank shares saw a third of their value wiped-off for a second day, NIESR’s analysis showed Greece’s economy will slump back into recession this year and next.
By the end of 2016, the economy is forecast to be 30pc smaller than at its peak in 2007 and 7pc smaller than before it joined the euro in 2001.
“We don’t see Greece getting back to the level it was when it joined the euro in 2001, let alone anywhere near where it was before this crisis struck, so this is a prolonged and severe depression for Greece,” said Jack Meaning, research fellow at NIESR.
Economists said Greece’s creditors would need to write-off or restructure €95bn of its €320bn debt pile, or around 55pc of gross domestic product (GDP), in order to reduce its debt stock to around 130pc of GDP, from a projection of 186.9pc this year.
NIESR said this would make an International Monetary Fund (IMF) debt target of 120pc of GDP by 2020 - which it considers to be the maximum sustainable level - “at least possible”.
The think-tank’s forecasts showed the economy is expected to contract by 3pc in 2015 and 2.3pc in 2016, remaining in recession until the second half of 2016.
Under current projections, Greece’s economy is not expected to get back to its pre-euro size until the first half of 2023.
Simon Kirby, principle research fellow at NIESR, said: “You have to go back to the Great Depression to find economies hit harder by crisis. The 1920s were bad enough for the UK and that was nowhere near this.”
Mr Meaning said there remained a “large chance” of a Greek exit fom the single currency, with VAT hikes likely to hit the economy more than suggested by ordinary fiscal multipliers.
“Certainly, as the prospects for Greece deteriorate while inside the euro area, questions over Greece remaining a member will persist,” NIESR said.
NIESR’s recommended debt write-down is much larger than the 30pc implied by the IMF’s latest debt sustainability analysis, which warned that Greece may need a full moratorium on debt payments for 30 years. Europe has ruled out a nominal haircut on debt.
The Athens stock exchange fell by as much as 5pc on Tuesday morning, before paring the retreat to end the day down 1.2pc, at 659.94.
The banking index, comprising the four major lenders, was down 29.26pc, virtually at its 30pc daily limit for losses. It hit that limit on Monday.