Achieving higher growth would be nearly twice as effective when it comes to reducing Greece’s debt as relying on very high budget primary surpluses, according to a study released on Thursday by credit rating agency Scope Ratings.
Scope “tested the sensitivity of Greece’s debt-to-GDP burden under [International Monetary Fund] forecasts using different assumptions regarding real growth rates and primary surpluses, all other factors being equal. A 1 percent higher growth rate over the next six years would result in a further reduction in public debt of around 11 percentage points of GDP by 2024… By contrast, an extra one percentage point higher primary surplus-to-GDP would result in an additional debt reduction of only 6 percentage points of GDP,” the analysis says.
While adhering to the spending targets helps boost investor confidence, it could also have adverse effects, according to Jakob Suwalski, lead analyst on Greece at Scope.
“Our concern is that if primary surpluses are too high for too long, they could prevent the spending needed to fill Greece’s persistent investment gap, with the risk of exhausting Greek’s taxpaying capacity,” he said.