Financial Times
July 7, 2011
For months the debate on Greece’s prospects, on the spending cuts and revenue measures to further reduce the budget deficit, and on the various approaches to the rollover of bonded debt has continued. The French banks have put forward a complex proposal, involving a partial rollover with guarantee of principal and a link of the interest rate to future Greek gross domestic product growth. The European Union and the European Central Banks have constrained such proposals to forms that avoid declarations of “default” by the three major rating agencies, so that the financial engineering under discussion cannot do much to reduce the burden of debt. The kind of swap under consideration could gain time to allow more fundamental solutions to be worked out.
Hundreds of articles have been written on the financial engineering involved. But the recovery depends also, and even more so, on rekindling growth and generating jobs. Without growth, the debt to GDP ratio, widely used as an indicator of “trouble”, could rise further, even if the debt figure, in the numerator, declines. The denominator in this ratio, Greece’s GDP, should be as important as the numerator in debt sustainability analysis. Moreover, without new jobs, the whole Greek programme will not be socially sustainable, no matter what happens to the debt to GDP ratio. While the financial engineering work has to go on, it is high time that an equal effort is spent on how to support growth of output and employment, even within the constraints of the macro-financial situation.
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