Is Greece on the Right Track?
WP08/12-01E
COLUMBIA UNIVERSITY: SCHOOL OF INTERNATIONAL AND PUBLIC AFFAIRS
CENTRAL BANK OF ARMENIA: MONETARY POLICY DEPARTMENT
Is Greece on the Right Track?
Debt Sustainability with Stochastic Approach
Paloma Alonso García-Puente, Zeina El Khoury, Vahagn Grigoryan, Tomoyuki Yamada
5/7/2012
Abstract
The aim of our paper is to analyze the sustainability of the Greek public debt from a risk management point view. We use a VAR model that takes into account the stochastic nature of the variables in the debt accumulation equation and their close interrelation and compute the probability of debt being above a specific threshold under different scenarios or conditions currently required by the IMF.
The scenarios include specific primary surplus levels, privatization, and the inclusion of contingent liabilities. We find that even though debt under these requirements is sustainable in its mean, there are non-trivial probabilities where it is clearly unsustainable.