Implications for the Eurozone crisis


My argument that foreign debt is more important than public debt has a number of implications the ongoing Eurozone crisis:

Ireland, which is on course to run a current-account surplus this year and which has an overall small net international debtor position (about 20% of GDP) should be able to withstand the crisis much more easily than countries like Portugal or Greece which are still running sizeable current-account deficits and which have very large net international debtor positions (about 100% of GDP).

It might be more important for Greece (and Portugal) to achieve an external (current-account) surplus than a fiscal (primary) surplus.

In order to restore the creditworthiness of a country policymakers need to cut its foreign debt, not just public debt in general.

Given that by now only about one-half of all Greek government bonds are held by private foreign residents, it will be difficult to solve the problem by defaulting on government debt alone.