It's been a good year for the eurozone crisis in the sense that flare-ups have been few and minor.
But here comes thinktank Capital Economics with the gloomy diagnosis that Greece's public debt (currently at 170% of GDP) is still unsustainably high and "the country's crisis is not yet over". That is despite the clear improvement in the public finances since the second bailout in 2012.
The problem is not the short-term one of plugging a funding gap (of maybe €11bn) for 2014 and 2015 that will appear next year. Capital Economics, like others, thinks a deal can be done in which Greece agrees to some extra austerity measures and eurozone governments provide more loans.
Rather, the worry concerns Greece's longer-term debt dynamics. The existing bailout requires Greece to run a primary fiscal surplus (ie, before debt interest payments) of 4% of GDP until 2030 in order to get the public-debt-to-GDP ratio to 90%. Greeks may not tolerate year upon year of austerity.
Second, there is a risk that deflation undermines projections. Prices, according to the bail-out script, are meant to start rising again in 2015. Capital Economics is sceptical. If it is right, Greece's nominal GDP would then rise only slowly, allowing little gain in the main debt-to-GDP target.
Third, if deflation becomes entrenched, eurozone governments might have to look at writing off portions of their loans to Greece. "Needless to say, it is hard to imagine the rest of the eurozone agreeing to provide this kind of support due to domestic political considerations and the potential moral hazard problems that it could create," concludes the thinktank.
Fair comment. Grexit – or Greece's exit from the eurozone – is still a possibility, albeit not soon.
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