You are using an older browser version. Please use a supported version for the best MSN experience.

Will Greece Ever Pay Off Its Debt?

Investopedia logoInvestopedia 12-05-2015 Matthew Johnston
The question of whether Greece will ever pay of its debt appears to be a simple matter of accounting © Thinkstock The question of whether Greece will ever pay of its debt appears to be a simple matter of accounting

The question of whether Greece will ever pay off its debt appears to be a simple matter of accounting. Pull out the balance sheet, add up the assets and then subtract the liabilities; if the assets are at least equal to the liabilities, then anyone can, in theory, pay off debt. But this is just talk about the numerical measure of value, not the real underlying values themselves. The problem in Greece is ultimately not one of accounting, but a political one about value. As a matter of simple accounting, Greece could potentially pay off its debt, but since the problem is political in nature, the answer becomes much less clear.

Matters of Accounting

Greece’s total debt sits at around €320 billion, and yet, there is no question that Greece has enough assets to cover its liabilities.  However, it is not a matter of whether or not Greece can pay its debts. The government can pay, it just doesn’t want to because this would require more sacrifices than the Greek government could sustainably demand of its citizens.

The country’s current debt-servicing schedule requires that Greece runs a primary surplus equal to 4.5 percent of GDP for years into the future. The Greek government says this is unsustainable while creditors scoff at these claims. The European Central Bank points out that a number of other eurozone economies were able to do this within the past 30 years, including Greece from 1994 to 1999.

A budget surplus of this magnitude may be possible in theory, but it requires a relatively healthy economy, and Greece is far from that right now. In fact, Greece’s situation is comparable to the Great Depression as in both scenarios output dropped a whopping 30 percent from peak levels. Contrary to the ECB’s stance, one analyst states that no unhealthy economy has ever been able to run a primary surplus over 4 percent of GDP.

Negotiating the Debt—Who Will Pay?

Greece’s troubles recently led the International Monetary Fund to warn eurozone member creditors that the organization will withhold Greece’s badly needed €7.2 billion bailout aid if they do not significantly write-down its sovereign debt . The eurozone creditors, who hold the majority of Greek debt, are staunchly opposed to any debt relief. Yet, as debt payment deadlines for a cash-strapped Greek government near, the threat of default looms—a scenario no creditor wants.

Supposing Greece’s eurozone creditors were to provide full debt relief, the cost burden per individual citizen would be the following in each of the creditor countries: Netherlands: €708; Germany: €700; Finland: €687, Austria: €683; Belgium: €646; France: €642; Italy: €623; Spain: €531; Slovakia: €278 and Portugal: €105.  Keeping in mind that these figures are based on full debt relief—which is more than what the IMF is demanding—it would appear that the costs would be somewhat manageable, at least more so than what Greece owes to its fellow eurozone members and other creditors.

The Political Matters

Although this may burden may more doable than what individual Greek citizens would have to bear, it would be hard to convince voters to pay for Greek debt considering that Greeks receive certain benefits that they themselves do not.

For instance, Greece currently spends more than any other European country in pension payments at 17.5 percent of GDP. Germany, Greece’s primary Eurozone creditor, only spends 12.3 percent of GDP on pension payments. It is not hard to see why German citizens find it difficult to dip into their pockets to pay for Greeks who receive greater retirement benefits.

While it is true in most cases that Greeks receive more benefits than other eurozone residents, Greece has made many sacrifices over the past five years that have had devastating impacts on its economy. Greek citizens feel they are victims of outside economic forces and do not see why they should have to give up their benefits and security. To them, the euro appears to be anathema, not a blessing.

The Bottom Line

Generally, when you are lent money, a good principle to follow is to pay it back. It is considered good because this principle is supposed to uphold social cohesion by developing trust and respect amongst all parties involved. However, it is the very social cohesion of the European Union that is at risk of being shattered due to eurozone members’ insistence that Greece pay its debts in full while it suffers severe economic hardship. There’s no doubt Greece could use some structural reform, but more than anything, it needs a helping hand. Greece’s ability to pay off its debt will likely depend on the extent to which that hand is willing to help.

More from Investopedia

image beaconimage beaconimage beacon