Europe should restructure Greece Debt

August 19, 2015

Europe should restructure Greece Debt: Debt Relief?

by NY Times Editorial Board

The International Monetary Fund is doing the right thing by not participating in a deeply flawed loan agreement that European leaders have negotiated with Greece.

Greece Debt BurdenThe Issue: Should Germany and others in EU bear cost of Debt Relief

Years of misguided economic policies sought by Germany and other creditors have helped to push Greece into a depression, left more than a quarter of its workers unemployed and saddled it with a debt it cannot repay. The latest European attempt to bail out Greece will make the situation even worse by requiring the country’s government to cut spending and raise taxes while increasing the country’s debt to 200 percent of its gross domestic product, from about 170 percent now.

The I.M.F., which joined European countries in their first two loan programs for Greece, says it cannot lend more money because Greece’s debt has become unsustainable. In a statement on Friday, the fund’s managing director, Christine Lagarde, said Greece’s creditors had to provide “significant debt relief” to the country. Last month, the fund said creditors needed to either reduce the amount of money Greece owes or extend the maturity of that debt by up to 30 years.

This is a much tougher position than the I.M.F. has taken before. In 2010, it did not insist that Greek debt be restructured. That was a big mistake because it left Greece with more debt than it had before the crisis and reduced the government’s ability to stimulate the economy. What Ms. Lagarde, a former French finance minister, says matters because European leaders like Chancellor Angela Merkel of Germany want the fund to be a part of the loan program since it has extensive expertise in dealing with financial crises.

European officials have said only vaguely that they might be willing to consider debt relief. Many lawmakers and voters in other European nations oppose providing more help because they think the Greek government has failed to carry out the economic and fiscal reforms that would make the country more productive.

There is no question that Prime Minister Alexis Tsipras of Greece needs to do more to raise economic growth. But even if he does everything European leaders are asking him to do — a list that includes cutting pensions, simplifying regulations, privatizing state-owned businesses — the country will still not be able to pay back the 300 billion euros it owes. Rather than go through a messy default in a few years, it is in Europe’s interest to heed the I.M.F.’s advice and restructure Greece’s debt now.


7 thoughts on “Europe should restructure Greece Debt

  1. As usual, when politicians mismanage national finances, taxpayers bear the burden. Debt relief comes at a high cost. Unfortunately, in the case of the EU, German and French taxpayers will have to shoulder the cost of debt relief for Greece if Europe accepts IMF advice. What about Greece itself? To me, the Greeks must buck up and not expect others to bail them out without conditions.–Din Merican

  2. That too will come at even greater cost. Socialism akin to what was in Eastern Europe has been with the Greeks since the end of World War II. Eastern Europeans realised early that before you take out of the system you have to put into it and moved away in the early 90s. It does not matter if you are a socialist or a capitalist. The basics in any economics is that a debt is a debt until you pay it. And deficit financing only works if you have a keen eye on supply and demand.

    But again in the present economic environment where over the last decade banks in the more developed world and to a limited extent in developing economies have been punishing the person who saves with very low if not zero interest and very attractive schemes for those who borrow money may be tempting Greece to be a borrower rather than saving money to become a lender. But still do not be fooled by the global financial system. Your financial order still governs your social order. As they say in Tamil, a person without cash is a walking corps. Hence, the state like individuals should also strive to become cash rich.

  3. The same mistakes again and again…

    1. Greece was never bailed out.

    2. If Greece was a mismanaged country it was nobody’s business but theirs.

    3. Greece’s entry into the EURO was achieved by cooking the books…and the connivance of Greek political leaders.

    The Greeks are dithering… until now I thought they were being murdered,… but now it appears they are commiting suicide… They ought to leave the EURO and the EU.

  4. That is if Germany allows such thing to happen. I am talking about grexit. Germany has problem of its own. The cost of unification is not settled yet

  5. Din, I beg to differ. A non EU sovereign central bank, such as the one Governor Zeti controls, has a control of two out of three rates, i.e. interest rates, exchange rates, and inflation rates. Joining EU, Greece Central Bank lost control of her exchange rates. Now, given its’ current financial state (not in dire condition, as compared to issue faced by Japan), Greece will only see one thing coming in their way, i.e. hyperinflation. If EU is a brotherhood amongst equal, Greece should be given a seat in decision to resolve mentioned issue collectively. At this point, it is not hard to imagine today’s EU as being an unholy economic empire with Germany being on the throne, strangling with her weaker brothers (i.e. Greece, Spain, Italy and even France).

    A responsible thing to do for Greece’s economic health is the working on preparation for a reset. The only way to do this is to allow some default (i.e. writing down bad-loans), and reissue loans backed by sustainable economic activities. Existing state of affair would merely be bailing out creditors (i.e. Greece sovereign bond holders, in which case, would be other EU sovereign members on the throne that has all the terms to dictate what Greece could do), at the expense of Greek citizens. With close of a decade since the first incident, most of Greece’s creditors have already been given ample time to be prepared for the worst, and should have began the writing down of the bad-loans.

    In this, I would agree with the Pope’s call that even nation should have the ability to go into Chapter 11, and restart.

  6. Katasayang,
    Greece does have equal say with respect to their population. It’s just that Germany has always been the paymaster. To a certain extent, france and UK

  7. I must first apologize for not posting links to background rhetoric of where I am coming from. Send forth is the link of two line of thoughts in my mind.

    1. Germany has been benefiting from the Euro (aka beggar thy neighbour). So, a responsible partner should think of the loan as a necessary cost to pay for the benefits gained, and a needed cost of upkeep the monetary union. Generally, I prefer to see a one-time tax forgiveness, rather than a delayed loan re-payment.

    2. When a nation’s credibility is being questioned, it is good practice to exercise the breaking of ‘bad bank, good bank’ to salvage little confidence there is to fund a nation’s operation. We Malaysians know it well from our own experience of dealing of bad loans in ’97.
    Thus, in my mind, Greece would be better served using the same technique.

    @loose74 As per current state of affair, UK has provided little help. France and Italy has indeed done some help. But both nations is facing a daunting high level of debt. Austerity alone might be creating more harm to Greece, without providing any benefits to Euro. This is especially true, in light of how US has been able to rely on QE to get their way out in the short term.

    Following link has good info of the breakdown of Greece’s debt.

    I do hope Dato Din would spend more effort to share thoughts on what to do next for the nation. Malaysia’s high level of household debt is indeed something that is worrying that has been swept under the rug. To me, allowing people to refinance in a world of mounting pressure on housing price in Malaysia is something that needed to be addressed also, as the nation has been engrossed with political turmoil. This debt refinancing too would be a bailout of individual homeowners at the expense of nation’s wealth. Good or bad, let the debate begins sooner, rather than later for Malaysia.

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