The danger of public debt

One of the biggest «gifts» of Greece’s membership in the eurozone is the low interest rates on a stable currency that replaced the worn-out drachma. The «gift» means cheaper loans (but also ridiculously low rates on deposits). This is reflected in the national budget: The ratio of interest paid in public debt servicing of the gross domestic product (GDP) is falling steadily. Economy Minister Nikos Christodoulakis noted with some pride in the draft budget document he unveiled last month that the rate of such interest to GDP will fall to 22 percent in 2004 – a steep decline from 37 percent in 1998. As usual, a half truth is much worse than a lie. The «improvement» in which the the minister took pride, is due to two factors. First, it is caused by a significant rise in the nominal GDP (which includes a high inflation rate). However, this was mainly due to the fact that we consume a lot by borrowing more, and because Brussels gives us a lot to throw more tarmac on the roads, which makes a few contractors still richer. This, in combination with a rise in the tax burden, creates the statistical result that Christodoulakis took pride in. The real incomes of Greeks have not risen. The fall in interest payments on public debt does not mean any smaller burden on each taxpayer. In reality, the burden is growing and will begin to be added to the private debt of households. The deceptive improvement is also due to another factor, the lower interest rates paid by the government on the bonds it issues to cover our huge collective debt. This has only happened because Greece is a member of the eurozone. Analysts of this particular segment of the capital market take the view that Greek government bonds carry very low interest rates only because the international bond market has not taken careful interest in Greek paper since we joined the common currency, absorbed as it was in the problems of the economic downturn in the bigger countries. When, however, they «X-ray» the economy again, as Moody’s credit rating agency did recently, the cost of debt servicing is bound to go up. In any case, all such ratios are much less important than the absolute figure that public debt interest payments have reached; in 2004, this is estimated at nearly 10 billion euros. If in this we include the interest paid on an increasing debt for arms purchases, on public enterprises – such as OTE Telecom which is in danger of seeing its credit rating lowered again – as well as local government authorities that are facing difficulties because the central government deprives them of valuable revenue, it should be apparent that we are facing a dangerous bubble of public debt. Concern is further heightened by the growing spending requirements for a successful Olympic Games next year. Four billion euros has been planned for public investment and Olympic projects in 2004 – plus 300 million euros for «expenses for Olympic preparations» – on top of the extra 600 million we paid last year. Most of this money is not in the kitty and can only come from additional borrowing. It is paradoxical and dangerous for the government – obviously «in full pre-election readiness» – to raise salaries in the public sector by an average of 5.4 percent, which is much more than the expected inflation rate, and also to increase benefits. It is absolutely true that we owe a lot to a great number of public servants, those to whom we entrust our children’s education, security, health and other key governance functions. Governments should build hospitals but not if they forget the cost of organization, the expensive equipment and the human resources needed to operate them. The situation with public finances is much more dangerous than admitted by Christodoulakis or imagined by the average citizen, who seems to have put behind him the miserable era of huge deficits ahead of the country’s drive to join the eurozone. The total accumulated debt is the most convincing indicator: When it is estimated to rise by 9.3 billion euros this year and much more than the 7.8 billion that the minister projects for 2004, reaching the astronomical – by Greek standards – sum of 185 billion euros, we know it is time to worry.