November 20th, 2012 by Hafiz Noor Shams
The Economist supports further debt forgiveness for Greece to get Greece out of the economic disaster it is in now. I support such move. It is essentially a default, but making it consensual between the creditors and the debtors will be important in maintaining some kind of stability in the market.
The forgiveness will definitely free up resources for the Greek government. Even right now, just as The Economist wrote, Greece is increasingly unlikely to repay whatever it owe without resorting to the debt market. Besides, as The Economist pointed out in the same article, more than 70% of Greek debts are owned by European governments and the ECB. Given that these governments as well as the ECB are in it together with Greece if they want to maintain the integrity of the Eurozone, they should take further haircut. The ECB has been adamant about not suffering a haircut, but I think that is an unfair uncompromising position given how private bondholders had agreed to a haircut themselves. Why should the other sector be any different?
Right now, Greece is utterly dependent on bailout money from the Troika to run its government. The bailout money has been the carrot for various necessary reforms in Greece. The Troika wants Greece to execute those reforms before releasing the bailout money. With the Greek tight on money, bankruptcy looms.
If it was not for all the European complications, an outright default would have been the best way forward. It is clear that Greece cannot pay whatever it borrowed and the world might as well accept it and more on. Greece will undergo severe pain (it is already there anyway) but at least, it would have smaller or no debt at all after that. Greece can start afresh.
I think, the best is for the Troika, the government creditors as well as the ECB especially to peg debt forgiveness with the pace of reform, just as The Economist proposed. That would be better than pegging the bailout money to reform. Bailout money only increases the burden of debt for Greece and I am unsure how that would help in the long run. Considerable amount of government revenue would continue to go into servicing those old and new debts and only limited residual resources would be available for Greece to invest in itself. A debt relief program may enable Greece to invest in itself and carry itself out of the hole sooner than the ongoing bailout program can.