Fall 2015 Brookings Panel on Economic Activity Weblogging: Greece: Schumacher and Weder di Mauro

Fall 2015 BPEA Th 1:00 PM: Schumacher and Weder di Mauro’s paper, “Diagnosing Greek Debt Sustainability: Why Is It so Hard?”, confuses me. It is not at all clear to me what “sustainable” or “less than 20% chance of debt-distress” really mean–as, indeed, it has become a term a political art rather than one of economic analysis.

Moreover, the interest-rate configuration now is so weird that I do not see how debt sustainability benchmarks constructed for what we used to see as normal times can be useful.

The German ten-year bund rate has been below the eurozone’s inflation target for more than four years now. The U.S. thirty-year Treasury rate has been below projected U.S. nominal GDP growth for more than eight years now. It is usually the case that, as the late Michael Mussa used to say, debt sustainability analyses are of the nature of: “if… if… if… as they would say where I grew up: ‘if my grandmother had wheels, she would be a bus’.” That is overwhelmingly the case now.

So I think we need to go back to basics. Rather than picking up sustainability benchmarks built for a different global macroeconomic situation. I want to see what is assumed with respect to:

• what the yield premium over the German benchmark is.
• when the German benchmark is expected to normalize.
• what the German benchmark is expected to normalize to.
• how fast the real principal is expected to be paid down.
• what share of GDP can be expected to be devoted to debt service and amortization.