Vox
May 18, 2010
The Eurozone crisis is not over. This column argues that solving it requires a voluntary debt swap. Creditors should be invited to swap old Greek bonds for new bonds backed by the European and IMF package. Par values would be the same but the coupons would be lower and the maturities doubled. The exact parameters should be set so the value of the greater certainty of payout was offset by the lower coupons. This would strengthen the euro, facilitate recovery of the $145 billion pledged, and yet force private creditors to realise that Eurozone support is not a one-way bet.
There is a simple way to resolve the Greek problem that will strengthen the euro, not undermine it, will lead international tax payers to recover the $145 billion they have pledged, not lose it, and will not require ambitious institution building in Europe at a time when the electorate is euro-fatigued. The solution requires three critical ingredients. So far we have seen much of two of them: an onerous Greek stabilisation package and the commitment to a very substantial package of fiscal support to Greece by European countries and the IMF. But doubling and redoubling these will not shock and awe markets into submission while the third ingredient remains missing. No amount of additional flour will make the bread rise if there is no yeast. The missing ingredient is a debt swap that lowers Greece’s interest payments to affordable levels, frees up resources critical to support economic activity and reintroduces market discipline into fiscal policy.
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