Greek Default Burden Shifting to TaxPayers

April 16, 2012 - Economy

Greece has officially defaulted, which has helped them reduce their debt-to-GDP ratio. Although Greece’s debt burden has alleviated some of the fears of Greek citizens and global investors, it has also created a number of other challenges for the global community. The cost of the default must now be paid for by the rest of the world. Taxpayers throughout Europe may need to start paying the price soon.

According to Luigi Zingales, a professor of Chicago School of Business and a 20 year veteran of the financial industry, another default will be particularly hard on the people of Europe. Despite the lauding of the global financial industry, Zingales believes the prospect of another default is almost inevitable.

While markets assume that the decrease in the debt-to-GDP ratio is a positive indicator, it still appears to be teetering on unsustainable levels. At the moment, it is over 120%. There are a number of assumptions as to how Greece is going to be able to fix its GDP problem in the coming years. However, most of them are particularly optimistic.

Zingales isn’t the only author that feels this way. Many other economists feel that there is no way for Greece to fix its debt problem. A couple of reasons they have cited include:

  • Greek bonds are now trading at distressed levels. As interest rates continue to climb, it will become progressively more difficult for the country to get its debt burden paid down. They are already trading at nearly 20%.
  • Greece’s economy is projected to contract over the next year as they are forced to implement further austerity measures. A decline of nearly 10% of GDP would significantly reduce tax revenues, thereby making it nearly impossible to meet the debt burden.
  • The future outlook for many citizens isn’t good. The youth unemployment rate is nearing 50% and social unrest is becoming a greater and greater concern. The bleak outlook for the new generation is going to pose an even greater problem for the future of the country over the coming decades.

Despite the optimism relayed by some economists, the future for the UK economy isn’t too bright. They are going to need a number of new measures to boost economic growth before Greece can reverse its crisis and begin to pay down its debt burden again. Although it isn’t impossible for it to do so,  there are going to be plenty more challenges down the road which could create another burden to the people of Europe.