Wolfgang Münchau, of Eurointelligence, shows how it’s obvious Greece will default, based its current course.
It doesn’t take rocket science to do the maths.
Basically, Greece has a budget deficit before interest payments of 7.9% right now. At the same time it is paying about 6% on its marginal debt (any debt it issues today, and actually the value is a bit higher right now for 10-year bonds).
In order for Greece to simply stop increasing its total outstanding debt, it thus has to achieve a primary budget surplus of about 7.44% if interest payments are not to push the budget into deficit, according to Mr. Münchau. This is assuming the economy doesn’t grow. If the economy can manage 2% growth, then Greece needs a 4.96% budget surplus just to tread water. Note that Greece’s economy is actually contracting right now. If it continues to contract, then a budget surplus well above 7.44% will be required just to keep total debt from increasing. (not even bringing debt down)
Now given that Greece currently runs a huge budget deficit, of 7.9% as mentioned above, the adjustment required to curb total debt growth is equal to the deficit plus the required surplus.
Under the scenario of interest rates at 6% and nominal growth rate at 2%, the total size of the adjustment would be a whopping 13 percentage points. If the growth rate falls to zero, the adjustment would be 15.5 percentage points.
The only advanced economies in modern times ever to achieve such a shift were Denmark, Sweden and Finland during the 1980s and 1990s. But they benefited from vastly superior growth.
A 13% adjustment for the budget vs. GDP, as shown by the ‘THE GOOD’ scenario in the chart above which assumes 2% GDP growth for Greece in the near term, would already require about a 30% cut in public spending since tax revenues came to 41% of GDP in 2008 and expenditures came in at 44%.
Let’s face it, a 30% cut, heck even a 20% cut, is most likely an impossibility, and this is based on the ‘good scenario for GDP growth’. This shows how, whatever the end game is for Greece, default ultimately can’t be avoided based on the status quo.
There’s more from Mr. Münchau here.
And don’t miss: Here’s who is going to get slammed in a Greece default >
Business Insider Emails & Alerts
Site highlights each day to your inbox.