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Greece will remain a disaster until it gets the treatment given to heavily
indebted poor countries in the past
Nov 10th 2012 | from the print edition
A GENERAL strike; protesters on the streets; parliamentary battles over
austerity measures needed to unlock rescue funds; and a sinking economy with an
ever bigger debt burden. The situation in Athens this week is grimly familiar
and not just because Greece has had so many similar weeks over the past couple
of years. There are also eerie echoes of the developing-country debt crises of
the 1980s and 1990s.
The experience of dozens of debt-ridden countries in Latin America and Africa
holds lessons that Greece s rescuers ought to heed. For years, the IMF and
rich-world governments tried to help them with short-term rescue loans. But the
most indebted started to recover only when their debts, including those owed to
official creditors, were slashed. In Europe, Poland also provides a precedent:
its economy took off in the 1990s after it too was given a break by its
creditors.
Greece is in the same boat. Provided that the country s parliament passes the
2013 budget on November 11th, a fresh infusion of rescue funds will stave off
imminent catastrophe (see article). Yet Greece s economy won t recover until it
has more debt relief. That should involve, broadly, a two-part process: first,
agree on a plan to reduce debt if certain targets are met; then cut the debt in
stages over the next decade.
The starting point is that Greece is still bust. Earlier this year
private-sector bondholders reduced their nominal claims by more than 50%. But
the deal did not include the hefty holdings of Greek bonds at the European
Central Bank (ECB), and it was sweetened with funds borrowed from official
rescuers. For two years those rescuers had pretended Greece was solvent, and
provided official loans to pay off bondholders in full.
So more than 70% of the debts are now owed to official creditors (European
governments and the IMF). The chances of repayment are sinking with Greece s
economy. Government forecasts now suggest the country s debt will exceed 190%
of GDP in 2014, some 30 percentage points higher than the IMF predicted six
months ago. This debt burden cannot fall to a remotely sustainable level
without additional relief.
In private, many Europeans admit this. In public, they deny it categorically.
Germany s government is now willing to grant the Greeks more time to implement
their austerity. But it will not even discuss any forgiveness of official
loans.
Politically, this is understandable. Germany worries that any debt relief will
reduce Greece s incentive to undertake reforms. And it would enrage German
voters, who might then punish Angela Merkel s government in the general
election next autumn. Economically, it is a disaster. As long as everybody
knows Greece cannot repay its debts, the country will remain shut out of
private bond markets and uncertainty about how those unpayable debts will
eventually be resolved will deter investment. It will slow the privatisation of
state assets, which is central to Greece s turnaround strategy.
HIPC, HIPC, hooray!
That s why Greece needs another debt-reduction deal. Its official creditors,
particularly the euro zone s governments and the ECB, should set out a plan for
reducing the country s debt burden while sharpening Greece s incentive to
reinvigorate reforms. One guide could be the HIPC initiative, the 1996 scheme
where lenders agreed to reduce the debts of the most Heavily Indebted Poor
Countries if they implemented reforms to reduce poverty. Another could be newly
democratic Poland, which had run up huge debts under its communist rulers; in
1991 sympathetic creditors agreed to cut its debt burden if reforms were
undertaken.
A bargain with Greece s official creditors could follow the same principle. A
deal would be agreed now: if Greece sticks to its reforms, its official debts
would be reduced, in stages, to a level where the stock was manageable (say,
120% of GDP by 2020), the burden bearable and the repayment schedule feasible.
The reduction could come through cutting interest rates and pushing out
maturities, perhaps to as much as 50 years. That way, Mrs Merkel can explain to
voters that the principal is being paid in full. The ECB, which holds Greece s
remaining unrestructured private bonds, should act fastest, accepting terms
similar to those imposed on private bondholders.
There are complications. The IMF sold gold to finance its share of HIPC debt
relief. Since Greece, even now, is far richer than most of the IMF s members,
Europe s creditor countries should shoulder the Fund s share of Greek debt
reduction. Greece might flunk its reforms or its budget numbers. But the impact
of laying out a credible path to debt sustainability could be powerful. Greeks
could start to believe they have a way out of the crisis; investors could put
money in the country with more certainty. It could create a positive circle of
confidence and growth. Without it, Greece s prospects are dire.
from the print edition | Leaders