Social Europe

politics, economy and employment & labour

  • Themes
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

Greece and Japan: A Tale Of Two Debt Write-Downs

Adair Turner 16th June 2016

Adair Turner

Adair Turner

At the end of 2015, Greece’s public debt was 176% of GDP, while Japan’s debt ratio was 248%. Neither government will ever repay all they owe. Write-offs and monetization are inevitable, putting both countries in a sort of global vanguard. With total public and private debt worldwide at 215% of world GDP and rising, the tools on which Greece and Japan depend will almost certainly be applied elsewhere as well.

Since 2010, official discussion of Greek debt has moved fitfully from fantasy to gradually dawning reality. The rescue program for Greece launched that year assumed that a falling debt ratio could be achieved without any private debt write-offs. After a huge restructuring of privately held debt in 2011, the ratio was forecast to reach 124% by 2020, a target the International Monetary Fund believed could be achieved, “but not with high probability.” Today, the IMF believes that a debt ratio of 173% is possible by 2020, but only if Greece’s official European creditors grant significant further debt relief.

Greece’s prospects for debt sustainability have worsened because the eurozone’s authorities have refused to accept significant debt write-downs. The 2010 program committed Greece to turn a primary fiscal deficit (excluding debt service) of 5% of GDP into a 6% surplus; but the austerity needed to deliver that consolidation produced a deep recession and a rising debt ratio. Now the eurozone is demanding that Greece turn its 2015 primary deficit of 1% of GDP into a 3.5%-of-GDP surplus, and to maintain that fiscal stance for decades to come.

But, as the IMF rightly argues, that goal is wildly unrealistic, and pursuing it would prove self-defeating. If talented young Greeks must fund perpetual surpluses to repay past debts, they can literally walk away from Greece’s debts by moving elsewhere in the European Union (taking tax revenues with them).

The IMF now proposes a more realistic 1.5%-of-GDP surplus, but that could put the debt ratio on a sustainable path only if combined with a significant write-down. Eurozone leaders’ official stance, however, continues to rule that out; they will consider only an extension of maturities and reduced interest rates at some future date.

If pursued to the limit, such adjustments can make any debt affordable – after all, a perpetual non-interest-bearing debt imposes no burden at all – while still enabling politicians to maintain the fiction that no debt had been written off. But the maturity extensions and rate reductions granted so far have been far less than needed to ensure debt sustainability. The time has come for honesty: A significant write-down is inevitable, and the longer it is put off, the larger it eventually will be.

Greece’s unresolved debt crisis still poses financial stability risks, but its $340 billion public debt is dwarfed by Japan’s $10 trillion. And while most Greek debt is now owed to official institutions, Japanese government bonds are held in private investment portfolios around the world. In Japan’s case, however, debt monetization, not an explicit write-off, will pave the path back to sustainability.

As with Greece, official fiscal forecasts for Japan have been fantasies. In 2010, the IMF described how Japan could reduce net debt (excluding government bonds held by quasi-government organizations) to a “sustainable” 80% of GDP by 2030, if it turned that year’s primary fiscal deficit of 6.5% of GDP into a 6.4%-of-GDP surplus by 2020, and maintained that surplus throughout the subsequent decade.

But virtually no progress toward this goal had been achieved by 2014. Instead, the new scenario foresaw that year’s 6%-of-GDP deficit swinging to a 5.6% surplus by 2020. In fact, fiscal tightening on anything like this scale would produce a deep recession, increasing the debt ratio.

The Japanese government has therefore abandoned its plan for an increase in sales tax in 2017, and the IMF has ceased publishing any scenario in which the debt ratio falls to some defined “sustainable” level. Its latest forecasts suggest a 2020 primary deficit still above 3% of GDP.

But the debt owed by the Japanese government to private investors is in free fall. Of Japan’s net debt of 130% of GDP, about half (66% of GDP) is owed to the Bank of Japan, which the government in turn owns. And with the BOJ buying government debt at a rate of ¥80 trillion ($746 billion) per year, while the government issues less than ¥40 trillion per year, the net debt of the Japanese consolidated public sector will fall to 28% of GDP by the end of 2018, and could reach zero sometime in the early 2020s.

The current official fiction, however, is that all the debt will eventually be resold to the private sector, becoming again a real public liability which must be repaid out of future fiscal surpluses. And if Japanese companies and households believe this fiction, they should rationally respond by saving to pay future taxes, thereby offsetting the stimulative effect of today’s fiscal deficits.

Realism would be a better basis for policy, converting some of the BOJ’s holdings of government bonds into a perpetual non-interest-bearing loan to the government. Tight constraints on the quantity of such monetization would be essential, but the alternative is not no monetization; it is undisciplined de facto monetization, accompanied by denials that any monetization is taking place.

In both Greece and Japan, excessive debts will be reduced by means previously regarded as unthinkable. It would have been far better if debts had never been allowed to grow to excess, if Greece had not joined the eurozone on fraudulent terms, and if Japan had deployed sufficiently aggressive policy to stimulate growth and inflation 20 years ago. Throughout the world, radically different policies are needed to enable economies to grow without the excessive private debt creation that occurred before 2008. But having allowed excessive debt to mount, sensible policy design must start from the recognition that many debts, both public and private, simply cannot be repaid.

© Project Syndicate

Adair Turner

Adair Turner, a former Chairman of the United Kingdom's Financial Services Authority, is a member of the UK's Financial Policy Committee and the House of Lords. He is also Chairman of INET.

You are here: Home / Economy / Greece and Japan: A Tale Of Two Debt Write-Downs

Most Popular Posts

Russian soldiers' mothers,war,Ukraine The Ukraine war and Russian soldiers’ mothersJennifer Mathers and Natasha Danilova
IGU,documents,International Gas Union,lobby,lobbying,sustainable finance taxonomy,green gas,EU,COP ‘Gaslighting’ Europe on fossil fuelsFaye Holder
Schengen,Fortress Europe,Romania,Bulgaria Romania and Bulgaria stuck in EU’s second tierMagdalena Ulceluse
income inequality,inequality,Gini,1 per cent,elephant chart,elephant Global income inequality: time to revise the elephantBranko Milanovic
Orbán,Hungary,Russia,Putin,sanctions,European Union,EU,European Parliament,commission,funds,funding Time to confront Europe’s rogue state—HungaryStephen Pogány

Most Recent Posts

reality check,EU foreign policy,Russia Russia’s invasion of Ukraine—a reality check for the EUHeidi Mauer, Richard Whitman and Nicholas Wright
permanent EU investment fund,Recovery and Resilience Facility,public investment,RRF Towards a permanent EU investment fundPhilipp Heimberger and Andreas Lichtenberger
sustainability,SDGs,Finland Embedding sustainability in a government programmeJohanna Juselius
social dialogue,social partners Social dialogue must be at the heart of Europe’s futureClaes-Mikael Ståhl
Jacinda Ardern,women,leadership,New Zealand What it means when Jacinda Ardern calls timePeter Davis

Other Social Europe Publications

front cover scaled Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship
Women Corona e1631700896969 500 Women and the coronavirus crisis
sere12 1 RE No. 12: Why No Economic Democracy in Sweden?

Foundation for European Progressive Studies Advertisement

The winter issue of the Progressive Post magazine from FEPS is out!

The sequence of recent catastrophes has thrust new words into our vocabulary—'polycrisis', for example, even 'permacrisis'. These challenges have multiple origins, reinforce each other and cannot be tackled individually. But could they also be opportunities for the EU?

This issue offers compelling analyses on the European health union, multilateralism and international co-operation, the state of the union, political alternatives to the narrative imposed by the right and much more!


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

The macroeconomic effects of re-applying the EU fiscal rules

Against the background of the European Commission's reform plans for the Stability and Growth Pact (SGP), this policy brief uses the macroeconometric multi-country model NiGEM to simulate the macroeconomic implications of the most relevant reform options from 2024 onwards. Next to a return to the existing and unreformed rules, the most prominent options include an expenditure rule linked to a debt anchor.

Our results for the euro area and its four biggest economies—France, Italy, Germany and Spain—indicate that returning to the rules of the SGP would lead to severe cuts in public spending, particularly if the SGP rules were interpreted as in the past. A more flexible interpretation would only somewhat ease the fiscal-adjustment burden. An expenditure rule along the lines of the European Fiscal Board would, however, not necessarily alleviate that burden in and of itself.

Our simulations show great care must be taken to specify the expenditure rule, such that fiscal consolidation is achieved in a growth-friendly way. Raising the debt ceiling to 90 per cent of gross domestic product and applying less demanding fiscal adjustments, as proposed by the IMK, would go a long way.


DOWNLOAD HERE

ILO advertisement

Global Wage Report 2022-23: The impact of inflation and COVID-19 on wages and purchasing power

The International Labour Organization's Global Wage Report is a key reference on wages and wage inequality for the academic community and policy-makers around the world.

This eighth edition of the report, The Impact of inflation and COVID-19 on wages and purchasing power, examines the evolution of real wages, giving a unique picture of wage trends globally and by region. The report includes evidence on how wages have evolved through the COVID-19 crisis as well as how the current inflationary context is biting into real wage growth in most regions of the world. The report shows that for the first time in the 21st century real wage growth has fallen to negative values while, at the same time, the gap between real productivity growth and real wage growth continues to widen.

The report analysis the evolution of the real total wage bill from 2019 to 2022 to show how its different components—employment, nominal wages and inflation—have changed during the COVID-19 crisis and, more recently, during the cost-of-living crisis. The decomposition of the total wage bill, and its evolution, is shown for all wage employees and distinguishes between women and men. The report also looks at changes in wage inequality and the gender pay gap to reveal how COVID-19 may have contributed to increasing income inequality in different regions of the world. Together, the empirical evidence in the report becomes the backbone of a policy discussion that could play a key role in a human-centred recovery from the different ongoing crises.


DOWNLOAD HERE

ETUI advertisement

The EU recovery strategy: a blueprint for a more Social Europe or a house of cards?

This new ETUI paper explores the European Union recovery strategy, with a focus on its potentially transformative aspects vis-à-vis European integration and its implications for the social dimension of the EU’s socio-economic governance. In particular, it reflects on whether the agreed measures provide sufficient safeguards against the spectre of austerity and whether these constitute steps away from treating social and labour policies as mere ‘variables’ of economic growth.


DOWNLOAD HERE

Eurofound advertisement

Eurofound webinar: Making telework work for everyone

Since 2020 more European workers and managers have enjoyed greater flexibility and autonomy in work and are reporting their preference for hybrid working. Also driven by technological developments and structural changes in employment, organisations are now integrating telework more permanently into their workplace.

To reflect on these shifts, on 6 December Eurofound researchers Oscar Vargas and John Hurley explored the challenges and opportunities of the surge in telework, as well as the overall growth of telework and teleworkable jobs in the EU and what this means for workers, managers, companies and policymakers.


WATCH THE WEBINAR HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube