- Combined with the private sector involvement, the ECB's decision to participate in the bond swap deal is an important step to reduce Greece's debt burden.
- However, the ECB will receive preferential treatment over private sector bondholders, which could lead to legal action and/or undermine bail-outs for other highly indebted euro area countries.
- Even with the latest ECB decision, Greek sovereign debt still looks unsustainable. If the bond swap deal with private investors and the ECB runs smoothly, Greek sovereign debt may still be higher than the 120% of GDP that Greece's international creditors want to see by 2020. This is primarily because of Greece's weak economic growth prospects.
- Furthermore, it is highly questionable that the 120%-of-GDP target is a desirable one. The debt burden would probably have to fall far below 100% of GDP to allow Greece to be able to return to reasonable economic growth rates to spur job creation and raise living standards.
- Hence, further debt write-downs will probably be necessary, including by Greece's public international creditors.
