Greece: Euro exit delayed?

In the immediate aftermath of Greece's unexpected victory over Russia at the Euros, the former Arsenal defender Lee Dixon is reported by my friends on Twitter to have said "you have to give the Greeks credit".

Actually the bankers to whom I speak would disagree with this analysis of Greece's fiscal difficulties. They would say that the country still has far too much debt and the last thing it needs is to borrow yet more. What needs to happen, if Greece is to remain in the eurozone in the longer term - they say - is for eurozone governments and the European Central Bank to write off a big slug of what they are owed.

What Greece needs is equity, not credit.

In case you have forgotten during the turmoil of what has since transpired, Greece's private-sector lenders agreed in the spring to let the Greek government off around 100bn euros of principal repayments.

But even with that massive and unprecedented cancelling of the debt of a developed economy, the total debt of the Greek government is estimated by the International Monetary Fund to be falling from an eye-watering 161% of GDP in 2011 to a still totally unsustainable 153% of GDP in 2012 - from where it is forecast to bounce back to 161% of GDP next year.

On current projections, Greece will remain the second most indebted economy of any size, as far as the eye can see. And pretty much all historical precedent would suggest the Greek economy cannot recover under this kind of debt burden (see Rogoff and Reinhart's Debt Overhangs: Past and Present for more on this).

And yet there is no suggestion that a write-down of the 161bn euros owed by Greece to eurozone governments and the 50bn euros owed to the European Central Bank is on the negotiating table.

Following the Greeks' unenthusiastic backing for the conservative New Democracy Party to form a new government, the noises from New Democracy is that it wants an extra two years to implement spending cuts and tax rises - the austerity programme - whereas the German government may be prepared to offer an extension of the repayment date on Greece's vast debt.

Neither dare talk about what many would say is the only thing that matters - the quantum of what Greece owes.

That's partly because forgiving Greece its official debts might well cause fury among German taxpayers - currently owed almost 90bn euros by the Greek state, if Bundesbank funding of lending by the Greek central bank is included (the so-called Target2 balance).

It's also because although Germany could probably afford a 50% writedown of what it's owed, given the strength of its economy and public finances (the writedown, excluding the Target2 credit, would be equivalent to just over 1% of its GDP), the same probably can't be said of Spain, Italy or even France (where the writedown costs would also be around 1% of GDP).

And there is a fear that debt forgiveness for Greece would be the thin end of a very thick wedge, such that Ireland - for example - might argue that if Greece were getting what would in effect be a large transfer from the rest of the eurozone, it would like a bit of that too, thank you very much.

All of which suggests that the eurozone will continue to expect Greece to honour all its massive debts.

But even before the latest worsening in the eurozone's more general crisis, the IMF was projecting that Greece's economy would shrink by 4.7% this year and stagnate in 2013. Unless there is some kind of miraculous recovery, the question will continue to loom large for Greek people and leaders whether they should try to escape a crushing debt burden by leaving the eurozone.