Greece’s problems Greece is the country that has lately been the main subject of speculation and discussion with regard to the sustainability of its public finances. Decades of substantial public-finance deficits have meant that Greece entered this recession with a gross public debt of over 100 per cent of GDP. The growth of the Greek economy has so far been less affected by the global economic downturn than the OECD average. This is partly explained by Greece’s relatively limited exposure to the world market but also by a considerable increase in public expenditure. This increase in expenditure, together with a slight fall in revenues, means that public sector indebtedness in Greece has increased to 115 per cent of GDP, and according to OECD forecasts from November it is expected to reach 130 per cent of GDP in 2011. (Slide: Gross public debt in Greece). The development of the central government debt in Greece, together with uncertainty about the country’s ability to actually carry out the far-reaching consolidation of its public finances, has caused Greek government bond rates to rocket. The market participants have seen an imminent risk that Greece will not be able to overcome its debt crisis without outside assistance. (Slide: Difference between Greece’s and Germany’s government bond rates). A couple of weeks ago, the euro countries reached an agreement, together with the IMF, on the design of a financial support package for Greece in order to safeguard financial stability in the euro area.
However, the aid measures promised so far have not succeeded in reassuring the markets. 3  See Reinhart and Rogoff (2010). BIS Review 56/2010  3  Several other countries also have serious problems with their public finances Other countries are also experiencing serious problems. Among the euro countries, apart from Greece, these are mainly Portugal, Italy, Ireland and Spain. Critical conditions for assessing how these countries shall attain a sustainable development of their public finances in the future are the current size of the public sector debt in relation to GDP, the credibility of their future fiscal policy and the conditions for growth in domestic and external demand. The larger a country’s debt in relation to its GDP, the greater its interest expenditure and the closer it is to an untenable situation. Among the countries I just mentioned, Italy has the largest burden of debt, with a gross public debt similar to that of Greece at just over 100 per cent of GDP. The other countries are not quite so vulnerable, but their debts are rising rapidly. (Slide: Gross public debt in Portugal, Ireland, Italy and Spain). The credibility of their future fiscal policy is a decisive factor, not least for the rate of interest they are forced to pay on their public debt. Here, earlier patterns of balance or deficit play an important role, as does, of course, the content of their fiscal policy consolidation programme.