3) At 317% of GDP, Greece’s debt load (which includes government and private debt) cannot be simply reduced through austerity measures or a lower euro. A recent McKinsey study argued that while there have been some historical examples of debt reduction, this was usually achieved through strong economic growth or a sustained period of austerity measures backed up strong political will. For example, Canada was able to reduce its debt from 91% of GDP in 1995 to 51% in 2007, but this was driven by strong global economic growth and rising commodity prices and exports. Similarly, at the end of World War II, the U.S. debt ratio stood at 121%, but the U.S. was able to reduce its debt levels through two decades of virtually uninterrupted economic growth. Neither option is available to Greece; global economic growth is beginning to slow down again while pension and healthcare payments to millions of retiring baby boomers will drain the coffers of all European economies for years to come.
Unless Greece’s substantial debt levels are restructured, I believe Greece will need another “bailout” program again in a few years, especially if world economic growth slows down again. In our investment newsletters to clients, I have previously pegged the chance of a Greek exit as between 25% and ...
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