Solv­ing the Greek debt: An at­trac­tive com­pro­mise

Financial Mirror (Cyprus) - - FRONT PAGE -

There is an ur­gent need to reach a so­lu­tion of the Greek debt prob­lem that is ef­fec­tive and ben­e­fi­cial for Greece, its Eu­ro­zone cred­i­tors, as well as for the whole Euro­pean and global econ­omy.

For­tu­nately, such a so­lu­tion ex­ists and is gain­ing sup­port. It is the pro­posal that sug­gests trans­form­ing the debt that Greece owes to Eu­ro­zone gov­ern­ments into GDPlinked bonds. Such bonds would link ser­vic­ing of in­ter­est pay­ments to the growth of the Greek econ­omy.

They would not re­duce the to­tal value of the debt for the cred­i­tors and, thus, sat­isfy the cred­i­tors’ key de­mand: no debt re­duc­tion for Greece. But what GDP-in­dexed bonds would do is re­duce debt ser­vic­ing in the short term for Greece, whilst its econ­omy is on a re­cov­ery path and not yet grow­ing suf­fi­ciently. Grant­ing Greece such a breath­ing space would be good for its econ­omy and for its cred­i­tors. Giv­ing growth a chance to pick up again would strengthen Greece’s ca­pac­ity to meet its debt obligations in the fu­ture and lower, if not al­to­gether re­move the risk that tax­pay­ers in the Eu­ro­zone coun­tries may ul­ti­mately have to pay for Greece’s debt bur­den.

Of course, the de­tails of such an ar­range­ment need to be worked out be­tween the cred­i­tors and Greece. How­ever, it could be the case that Greece would not ser­vice any of this debt for the next five years, un­less its GDP re­cov­ered at least half the loss of GDP it has suf­fered since the Eu­ro­zone started. If it did re­cover half the lost growth, and grew above 3%, then it would pay a small pro­por­tion of its growth in in­ter­est pay­ments.

The grace pe­riod would al­low Greece to have some ad­di­tional fis­cal space for restor­ing spend­ing on key sec­tors like health and ed­u­ca­tion, fos­ter­ing gov­er­nance re­forms, in­creas­ing pro­duc­tive public in­vest­ment and cre­at­ing a con­ducive pol­icy en­vi­ron­ment for pri­vate in­vest­ment, in­clud­ing by small- and medium-scale en­ter­prises. In­creased in­vest­ment could be also fi­nanced by in­sti­tu­tions like the Euro­pean In­vest­ment Bank, and by for­eign pri­vate in­vestors, both from Europe, but also from the US, China and other coun­tries.

Af­ter five years, as­sum­ing growth has picked up, the Greek econ­omy would ser­vice the debt in pro­por­tion to its growth. This would al­low it to fol­low a counter-cycli­cal fis­cal pol­icy that would smooth out po­ten­tial growth fluc­tu­a­tions and fa­cil­i­tate debt ser­vic­ing.

All this is not to say that Greece should to­tally aban­don fit­ting ad­vice that it has re­ceived in pre­vi­ous years, such as on in­creas­ing tax rev­enues, es­pe­cially on richer in­di­vid­u­als and large com­pa­nies, where there is tax eva­sion or in­suf­fi­cient tax­a­tion. Whether Troika ad­vice or not if it works for the Greek econ­omy and peo­ple, then just do it. But, in the same non-ide­o­log­i­cal and prag­matic way, Greece’s cred­i­tors should opt for promis­ing so­lu­tions, in­clud­ing that of GDP-linked bonds. There is no rea­son to brush this pro­posal aside only be­cause it was tabled by the Greek au­thor­i­ties,no­tably by Ya­nis Varo­ufakis, the Greek Min­is­ter of Fi­nance.

The

pro­posal

has met

with

strong sup­port, in­clud­ing from the Ger­man In­sti­tute for Eco­nomic Re­search (DIW) in Ber­lin, which pub­lished a sys­tem­atic anal­y­sis, con­clud­ing that there are strong rea­sons that speak for this ap­proach and by more gen­eral pa­pers in fa­vor of GDP linked bonds by the In­ter­na­tional Mon­e­tary Fund and the Bank of Eng­land. Fur­ther­more, some, one could even say, many of the world’s most renowned econ­o­mists – such as No­bel Prize win­ners Joseph Stiglitz, Robert Shiller and Chris Pis­sarides, but also many oth­ers – have urged the Euro­pean gov­ern­ments con­cerned to se­ri­ously con­sider steps along th­ese lines.

So, why not act on this pro­posal in the forth­com­ing meet­ings of the Eu­ro­zone fi­nance min­is­ters?

Im­por­tantly, a more gen­eral les­son to draw from the Greek debt cri­sis is that, in the fu­ture gov­ern­ments should, in good times, con­sider is­su­ing their debt in a way that links debt ser­vice to the growth of their econ­omy – in the form of GDP-linked bonds. This would make fu­ture dis­rup­tive and costly crises far less likely.

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