In 2023, the economy took the first step in this direction. Debt as a percentage of GDP fell by 11% of GDP to 160.5% of GDP, from 171.6% at the end of 2022. At the same time, as an absolute amount, debt stabilized at 357 million euros, increasing by only 400 million. euros compared to 2022, when it had reached 356.6 billion euros. This year, we are expected to see the first, after decades, reduction of the debt as an absolute amount by 1 billion euros, to 356 million euros from 357 million euros in 2023. That is, it will have a small reduction that remains to be seen if it will develop into a trend.
The need for a steady and rapid reduction of the debt is evident from its… weight on the budget, before Greece entered the memorandums and after the end of the bailout programs in the summer of 2018. Greece stopped borrowing from the markets in early 2010, year for which it would have to borrow to pay 16.5 billion euros in interest. At the same time, without the first rescue program, Greece would have to find another 25 billion euros from the markets to cover its fiscal deficit.
In 2024, after three memoranda and with the economy returning to growth, Greece will have to cover interest close to 4.8 billion euros, i.e. approximately 12 billion euros less than in 2010. At the same time, because the economy now produces stable primary surpluses, borrowing needs have been reduced to 5.5 billion euros from 41.5 billion euros.
Assistance packages
This huge reversal allowed Greece to finance €40 billion in support measures to mitigate the effects of the coronavirus and then the effects of the energy crisis in the period 2020-2023. At the same time, he reduced taxes and contributions totaling 6.7-6.8 billion euros. This year, for the first time, the economy allows an increase in public sector salaries of 10.4% on average, while it also brings additional measures to increase incomes for the entire economy amounting to 800 million euros. At the same time, while the debt is being reduced, the country’s defense is being strengthened with an ongoing armament program, which is expected to exceed 15 billion euros.
All this while the economy is expected to grow this year at a rate of 2.9% and now incomes have started to rise, with the Central Bank predicting for this year increases in wage labor by 7.1%. The more the debt decreases, the more Greece will move away from a new debt crisis, while at the same time the state will have more resources.
In a second reading, the lower debt leads, through the country’s credit rating upgrades, to lower borrowing rates for the Greek State. An example is the interest rate of the ten-year bond issued on January 30 with an interest rate of 3.75%, with Greece in the investment grade, compared to an interest rate of 4.75%, which had succeeded in issuing a 10-year bond issued on January 17, 2023. This difference of interest rate will give a benefit of 85 million euros in interest over the next 10 years.
The upgrade of the Government’s debt carries with it the evaluation of the banks, which will henceforth be able to borrow on more favorable terms and will in turn be able to lend at lower interest rates to the real economy. This profit has not been seen for now, due to the high interest rate situation from the ECB.
It is more visible in the field of corporate bonds, where, after the investment grade, bonds of 700 million euros have already been issued or are about to be issued by companies that have the ability to secure an evaluation from at least one rating agency.
The annual reduction equation by at least 4% of GDP for the next 30 – 35 years
A key condition for a stable debt decline is that the policy based on high growth and stable primary surpluses is in place. If this condition is met, the fastest de-escalation of the debt will be guaranteed, at a rate of at least 3% of GDP per year until 2060.
The Bank of Greece subscribes to this policy. In fact, due to his experience, the commander of the TtE, Mr. Yannis Stournaras, referring to the issue, he reminded in his own way that this policy should be a commonplace of future governments and not only of the current one. In fact, noting that the debt is on a steady downward trajectory, he meaningfully noted: “I certainly hope we don’t kill ourselves in the future.”
The future
Borrowing from the European Commission’s forecasts, the Public Debt Management Agency demonstrates why debt reduction will remain steadily downward.
According to the Commission, the net interest rate on total debt service from 1.2% in 2022 will increase marginally to 1.3% in 2024 and remain unchanged at the same levels in 2025 and 2026, to settle at medium levels in 2.8% in the long term. As a net interest rate, it is the average interest rate, if in the interest rate it achieves by borrowing from markets, the locked interest rates of 1.5% for the 2/3 of Greece’s total debt that is currently in the hands of the official sector, i.e. the eurozone, the EFSF and its successor, the ESM.
At the same time, real GDP will grow by 2.7% at average annual levels for the four-year period 2023-2026, to decline to 1.5% in the long term. However, nominal GDP (ie GDP plus inflation) on which the debt ratio is calculated will average 5.42% in the four-year period 2023-2026, falling to 3.6% in the longer term from 2027 and after. This shows that the effective annual cost of servicing the debt will be negative, so the debt will be reduced at an accelerating rate.
To the debt equation, to the fall in the form of an… avalanche, should be added the average annual primary surplus that will reach 2% of GDP in the period 2023-2026 and stabilize at 1.9% from 2027 onwards, which it will be able, in addition to the percentage of GDP, to reduce the net balance of the debt.
On this basis and if policy is not changed, we will have an annual reduction in GDP equal to nominal GDP (ie nominal GDP + the GDP deflator) plus the primary surplus minus the annual real interest rate on debt service. Unless growth or the primary surplus or the average debt service rate changes, debt will decline annually by at least 4% of GDP per year for the next 30-35 years.
All this while the Greek debt maintains an extremely positive profile in the markets. 2023 closes with 30 billion euros in cash, which can comfortably cover borrowing needs for another 3 years.
Finally, the annual cost of servicing the debt is and will remain below 10% of GDP annually for at least 30 years.
Cash reserves remain at high levels, still exceeding 35 billion euros, which gives Greece an opportunity that no other EU country has. In combination with the very low borrowing needs, Greece is the only country that can choose when and on what terms to borrow.
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