Closing of Greece’s output gap unlikely to solve its debt problems

One potential source of comfort for Greece is the fact that, after contracting by over 25% in the last five years, Greece's economy has a very large degree of spare capacity.  OECD estimates the Greek "output gap" at around 13% of GDP. 

The vast amount of spare capacity means that the underlying state of the public finances is rather better than the headline numbers suggest. But it would be wrong to conclude that the closing of Greece's output gap will solve its debt problems.

Capital Economics notes ....

• We retain the view that the only thing that can realistically bring Greece's public debts down to sustainable levels is a substantial write-down or default. 
  
  
• But with Germany and other euro-zone members likely to resist such a development as long as Greece remains inside the currency union, the danger of a Greek euro exit remains higher than widely perceived.