Greece will likely remain in intensive care for years without more help

Published: Sept 10, 2015 5:42 p.m. ET

The Market Watch

By GREG ROBB SENIOR ECONOMICS REPORTER

Although the short-term default emergency is over, Greece is likely to remain in intensive care for years and may recover only with further dramatic international assistance, according to papers presented by experts at a Brookings Institution conference Thursday.

Taking the long view, Harvard University economist Carmen Reinhart noted that Greece has been in a cycle of excessive borrowing and default since 1833 and was still repaying that first loan 100 years later.

It will take dramatic action to break the cycle.

A key ingredient to any solution would be a deep nominal haircut on the stock of official, and possibly private debt, Reinhart concluded.

Greece and its eurozone creditors reached a 86 billion euro bailout agreement, the country’s third such rescue package, in August. A review of reform measures agreed to by Greece in return for the aid is set to take place in October. The talks will come after Greek elections set for Sept. 20. The October review might present the first opportunity to discuss a restructuring of Greece’s debt. The International Monetary Fund said Greece’s debt level in unsustainable and significant debt relief is required.

Nobel Prize winning economist Christopher Pissarides of the London School of Economics said Greece still suffers from structural problems such as low productivity and lack of competitiveness.

There is likely to be a time lag for which Greece will need help from international institutions, longer than 3 to 4 years as has been the time frame for other European economic reform programs, he said.

Christopher House of the University of Michigan said that the size of Greece’s forced austerity will be painful. There will be sizable declines in output in both the short-and long-run, even if the budget cuts are delayed.

Julian Schumacher of the University of Mainz noted that Greece will be paying loans to European institutions until 2054. He said eurozone countries should consider debt forgiveness after an extended period of good policy track record, as the IMF and the World Bank did for the world’s poorest countries.