Greece had EUR100 billion erased off its huge EUR350 billion debt, but this doesn’t mean better times are ahead for the country.
Estimates show that only as late as 2020 will the country’s debt shrink to 120% of GDP.
A debt of 120% of GDP is double as much as the level accepted by European treaties – less than 60% of GDP.
Romania’s public debt, though small, leaped spectacularly, from 12.4% of GDP in 2006 to 31% of GDP in 2010 and 37% in the first eight months of 2011. It is a major leap, the 2010 debt nearly doubled every two years, which shows that however small the debt level, under tough macroeconomic conditions the slippage of budget spending can be uncontrollable.
Already interest spending has tripled in three years to 10 billion lei (about EUR2.3 billion).
“The debt must not rise too fast. Basically it rises by the value of the deficit. If it rises, the GDP should ideally rise, as well. If you have a year in which the GDP declines and it needs to finance investments, education etc, you really have a big problem and things can get out of hand. Because after a certain point it becomes too expensive, from one year to the next, to finance the deficit and repay the debt,’ says financial analyst Dragos Cabat.
The level considered acceptable under the Maastricht Treaty was under 60% of GDP, but many countries, among which Greece, overshot the mark.
Cabat says countries fell into the trap of saying: we will have growth and we will pay.
This was the Greek thinking, and the country continued down this path because it was able to get the money and get the amount it had asked for.
“The lesson for Romania is you need to grow, but not by running high deficits. Because financing these deficits could eat all your growth,” Cabat says.
(EUR1=RON4.315)
(English version by Daniela Stoican)