Financial Times
Editorial
July 3, 2011
Not for the first time, the leaders of Greece and of the eurozone have stepped back from the brink only after taking too long a look down the precipice. With the clock ticking toward a Greek default, Europe found the fig leaf of private creditor sacrifice it needed to commit to more loans. The Greek government passed a new austerity plan, but not before eroding the little trust it still enjoyed at home and abroad.
The eurozone must stop putting its peoples, economies and financial markets at the mercy of last-minute fixes. Debt markets’ ostracism of Greece and two other countries will not be reversed by buying time. The monetary union now needs an ambitious and comprehensive solution: it should commit to a Brady plan for Europe. A debt swap with guarantees, based on the policy that ended Latin America’s debt crisis, is the best option.
Europe’s sovereign debt crisis is most obviously rooted in the Greek state’s reckless borrowing and failure to reform. But it reflects market failure, too. Financial markets turn on self-fulfilling beliefs: even if Greece has a fighting chance to overcome its debt burden if it can refinance at modest interest rates, that is not a chance uncoordinated bond investors will grant it. Hence the need for official lenders to step into the gap, as they have done – but too timidly to trust that they will do “whatever it takes”.
Devising a better plan requires the right diagnosis of the current one. Structural reform and privatisation are both bogged down. But Athens’ deficit-cutting is an undeniable success: the primary deficit fell by 7 per cent of output in 2010. It is not impossible to stabilise and eventually reduce Greece‘s debt burden. Those who complain austerity is strangling the economy should bear in mind that Athens would have to cut even faster without the aid programme.
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