Sustainable Public Debt according to the Bank of Greece – What emerges from the alternative scenarios

The country’s Public Debt is considered sustainable until 2060, when it is expected to decline to 61% of GDP, according to the basic scenario elaborated by the Bank of Greece.

Throughout this period, the financial needs of the State for its service are kept below the limit of 15% of GDP. However, the favorable result, which to a large extent is a consequence of the favorable repayment terms of the country’s obligations to the official sector (thanks to the successive debt relief measures in 2012, 2017 and 2018), is not a “good fortune”, and for this reason, the economic policy in the coming years should aim at the rapid de-escalation of the public debt.

However, in the long term it is estimated that the increased uncertainty, as the gradual refinancing of the accumulated debt to the official sector on market terms will increase the exposure of the Greek State to interest rate risk, eliminates the scope for easing fiscal policy and forces the country to remain in primary surpluses .

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More specifically, the basic scenario which has been elaborated by the CoE foresees return to primary surplus from 2023, which expands to 2.0% of GDP in 2025 and is permanently maintained at this level. It is assumed that the fiscal space from the estimated savings in aging costs will be used to make the fiscal policy mix more growth-friendly.

The potential growth rate follows the most recent Eurosystem estimates for the first ten years of the simulation, then converges to 1.3% by 2070, according to the European Commission’s report on population ageing. This leads to a higher potential growth rate than the exposure in question by 0.1%. mon. in 2040 and equal to that of the report from 2050, which is attributed to a progressively decreasing positive effect on the one hand from the utilization of RRF resources and on the other hand from the aforementioned improvement in the fiscal policy mix.

On average, the rate of change of real GDP amounts to 1.8% in the period 2022-2060. Combined with the assumption of a long-run rate of change in the GDP deflator of 2%, nominal GDP expands at an average rate of 4.2% over the period 2022-2060, assuming that the output gap enters positive territory in 2022, widening to mid-decade and eliminated by 2030. Interest rates on the existing stock of debt follow the July 2022 CDIF assumptions, with the exception of EFSF and ESM loan rates, which converge to 4.0% in 2050. Furthermore, it takes considering the permanent removal of the 2% interest margin on the EFSF’s €11.3 billion debt buyback loan. The interest rate on GLF loans is calculated as the three-month Euribor plus 50 bp, while swaps cover the entire stock of GLF loans (loans granted transnationally to Greece by the eurozone member states).

Therefore, according to the above assumptions of the base scenario, the debt-to-GDP ratio is expected to erase a sustainable de-escalation trajectory, remaining however in the medium term above 100% of GDP and reaching 61% of GDP in 2060. The gross financing needs of the State are maintained in the medium term close to but within the limit of 15% of GDP and in any case within the long-term sustainability limit of 20% of GDP.

The SC has worked out more seven alternative scenarios, which lead to different results regarding the sustainability of the Debt.

For example, the scenario that foresees a GDP growth rate lower by 0.5% compared to the base scenario, results in the Public Debt in 2060 being higher by 28 percentage points, i.e. at 89% of GDP, the gross financial needs will be higher by 5 percentage points. units, while the refinancing rate is higher by 20 bp. on average over the period 2022-2060.

In the scenario with a smaller primary surplus of 1% of GDP – always in relation to the base scenario -, as a result of fiscal fatigue and the perpetuation of part of the temporary support measures taken in the context of the energy crisis. This leads in 2060 to a higher debt to GDP ratio of 52%. mon. That is, at 113% of GDP. As a result, financing needs increase by 10 percentage points. to 25% of GDP.

In the scenario under consideration, the effect of a permanent increase in international uncertainty leads the Public Debt in 2060 to 74% of GDP, while financing needs increase by only 2%. units to 17% of GDP.

The fifth scenario in a row examines the effect of a greater intensity and duration of inflationary pressures in the eurozone, which leads to a further contractionary change in monetary policy. In particular, the harmonized inflation in the euro zone is formed by 1.7 percent. mon. higher than in the baseline scenario during the first three years of the simulation and recovers to 2% one year later than in the baseline scenario. This leads in 2060 to a higher debt to GDP by 7%. mon. (i.e. 68% of GDP) and in higher financing needs increased by only 1% of GDP.

The consideration of all scenarios suggests, according to the BoE, that the existing favorable features of the accumulated debt do not constitute “estate” but provide a sufficient window of opportunity for the public debt to remain sustainable during the upcoming gradual refinancing of the soft loans. to the formal sector on market terms. According to the simulation results, the debt-to-GDP ratio is a determinant of the refinancing rate.

Its rapid de-escalation must be a priority of economic policy in the coming years, bearing in mind that key interest rates are not expected to return to pre-crisis levels, even with the de-escalation of inflation.

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