The Long Road Ahead for Greece (and Others)

Global financial markets have been rocked recently by concerns about the fiscal situation in Greece. To its credit, the Greek government has put forth an ambitious plan to sharply reduce its deficit over the next few years. Even with a significant fiscal correction, however, the debt-to-GDP ratio of the Greek government will continue to rise if nominal GDP growth remains sluggish. But how does the … Global financial markets have been rocked recently by concerns about the fiscal situation in Greece. To its credit, the Greek government has put forth an ambitious plan to sharply reduce its deficit over the next few years. Even with a significant fiscal correction, however, the debt-to-GDP ratio of the Greek government will continue to rise if nominal GDP growth remains sluggish. But how does the Hellenic republic pull off the trick of making a sizable fiscal correction while at the same time boosting nominal GDP growth? Given its fixed nominal exchange rate with the other members of the euro area, it will be difficult for Greece to export its way back to prosperity via exchange rate depreciation. In our view, there is a significant probability that the International Monetary Fund (IMF) will need to extend a lending package to Greece to help smooth out its adjustment. Given the significant resources that the IMF has at its disposal at present, a package for Greece would not break the IMF. The fiscal situations in Portugal and Ireland are not as dire as they are in Greece, but both countries could go hat in hand to the IMF, although probably not necessary, without putting undue strain on the IMF. In other words, the IMF has the resources available, if necessary, to help stabilize the financial situation in some Euro-zone economies. However, Spain is one of the 10 largest economies in the world, and any IMF package for that country would need to be sizable given the sheer size of the Spanish economy. If, in the unlikely event, the IMF needs to come to the simultaneous rescue of the four Euro-zone economies with the worst fiscal situations, the IMF’s ability to help other countries may start to be compromised. Thank you for your interest in Wells Fargo’s Economic Commentary by Email. You are receiving this message because you have requested Economic Commentary information and updates sent via email. If you no longer wish to receive these emails, please click on the following link to access the Economic Commentary by Email registration page: http://www.wachovia.com/economicsemail.