No easy an­swers to Greece's debt

The Pak Banker - - OPINION - Ab­dul­nasser Al­shaali

There is some­times no other way out of a coun­try's debt prob­lems ex­cept through par­tial or full debt re­lief. And this has been wit­nessed through­out history with the most re­cent be­ing debt re­lief for Euro­pean coun­tries post World War 1.

Also, half of Ger­many's debt, West Ger­many back then, was can­celled as part of Lon­don Debt Agree­ment signed in 1953 post Sec­ond World War. Here is an in­ter­est­ing clause in the agree­ment - Ger­many had to pay for the re­main­ing debt straight from its trade sur­plus.

In other words, Ger­many ex­ports its prod­ucts to the cred­i­tor coun­tries and pays 3 per cent of its rev­enues - a max­i­mum of 5 per cent at any time - when its ex­ports ex­ceed im­ports from that coun­try. Sounds sus­tain­able? Well, the Ger­many we know to­day tells us all that we need to know about how sus­tain­able such a pay­ment ar­range­ment has proven to be.

So what's wrong with Greece to­day? And why can't a sim­i­lar ar­range­ment be reached? Greece's dire eco­nomic and fi­nan­cial sit­u­a­tion could be at­trib­uted to a lot of fac­tors. One key fac­tor is the fact that Greece's econ­omy is highly de­pen­dent on tourism as a source of rev­enues and hard for­eign cur­ren­cies. When the drachma was in place, Greece's Cen­tral Bank could ex­ert in­flu­ence on how the cur­rency would fluc­tu­ate - i.e., ap­pre­ci­ate or de­pre­ci­ate.

Upon join­ing the Euro, these con­trols have been lost and the cen- tral bank had a say in fis­cal poli­cies only. One might ar­gue here about how much con­trol has been left af­ter the sign­ing of the first debt deal.

Un­for­tu­nately for Greece, the high de­pen­dency on tourism and ser­vices in con­trast to its ex­port­ing sec­tor has pre­vented the coun­try from patch­ing its frac­tured econ­omy to­gether.

There is no doubt here that many mis­takes have been made along the way, and that Greece would need to change quite a few things to be of­fered a debt re­lief - if ever. Like any other coun­try, Greece bor­rowed money to fund bud­get deficits or to fund public projects when gov­ern­ment rev­enues could not sup­port that.

The bonds is­sued has switched hands from pri­vate in­vestors to Euro­pean coun­tries; the In­ter­na­tional Mon­e­tary Fund; and the Euro­pean Cen­tral Bank, and were then re­fi­nanced at lower rates. That still couldn't and wouldn't solve Greece's fi­nan­cial dilemma and Greece will re­main stuck in what is re­ferred to as a "debt trap".

Given the cur­rent sta­tus quo, Greece's debt is pro­jected to be higher than $280 bil­lion (Dh1.03 tril­lion) by the year 2020. To solve this, it's not a mat­ter of whether or not a debt re­lief is nec­es­sary but a mat­ter of how it could be done within a fully planned frame­work of which debt should be re­lieved and which should be re­struc­tured and re­fi­nanced.

Also, Greece will need to be given a grace pe­riod dur­ing which it will be en­cour­aged to di­ver­sify its rev­enue sources and pri­va­tise its ma­jor public hold­ings like it has been do­ing be­fore its snap elec­tions. With a trade deficit of about $27 bil­lion, there is no pos­si­ble way for Greece to pay the re­main­ing debt to its Euro­pean coun­ter­parts if the trade for­mula was not vis­ited and mod­i­fied.

Greece im­ports from Ger­many more than it ex­ports to it, and it im­ports from France while ex­port­ing noth­ing back. Greece owes more than 50 bil­lion eu­ros (Dh209 bil­lion) and 40 bil­lion eu­ros to Ger­many and France re­spec­tively.

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