Stop Pretending on Greek Debt
Greece and its creditors say they’ve made progress in their endless negotiations over the country’s debts -- enough to avoid a default on payments worth more than 7 billion euros in July. That’s good, but it was the easy part. The definitive settlement that Greece and the European Union both need still isn’t in sight.
For the past seven years, the International Monetary Fund and euro-zone institutions have supported Athens with loans in exchange for fiscal austerity and structural economic reform. This strategy has failed to break Greece’s vicious circle of a shrinking economy and higher debt. Europe needs to bring this spiral to an end without further delay -- by putting Greece’s debts on a credibly downward path.
The IMF has made it clear that it will only take part in a rescue program that includes a realistic assessment of debt sustainability. This is a welcome break from the past: Time and again, creditors have deluded themselves that Greece can run implausibly high budget surpluses for years. Germany, especially, is keen to keep the IMF involved. With luck, Berlin might be willing to adjust the creditors’ proposals accordingly.
Greece has gone through nearly a decade of punishing austerity. Its unemployment rate is still stuck near 25 percent. Last week’s deal includes further tax and pension reforms worth 2 percent of gross domestic product. If consumers and companies are to spend and invest again, they must see an end to the tunnel. Economic necessity and political feasibility point to the same conclusion: Firm fiscal restraint is essential -- but not so firm as to be self-defeating.
The creditors therefore need to budge on debt relief. Private debtholders have already faced steep losses as part of the 2012 debt restructuring. The European Central Bank and the IMF aren’t willing to take losses because that would jeopardize their seniority and credibility. This leaves euro-zone governments and their rescue funds -- the European Stability Mechanism and its predecessor, the European Financial Stability Facility.
Outright debt reductions would be the clearest and most straightforward option, but governments fear offending their voters, who’ve been led to expect the money they lent to Greece to come back one day. The alternative is a package of other concessions -- including a further reduction of interest rates, plus extensions of maturities and grace periods. A sufficiently comprehensive plan is capable of making the debt sustainable. It should be made conditional on Greece meeting a set of feasible reform benchmarks, but not on achieving fiscal surpluses that nobody believes are achievable.
This isn’t a matter of letting Greece off the hook. The country can’t prosper within the euro zone unless it improves its economic performance, and that demands further reform. But it’s no less essential that the next agreement with creditors breaks the cycle of patch, mend and pretend.
--Editors: Ferdinando Giugliano, Clive Crook
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