A win-win strategy for investors in Greece

by Jean-Charles Bricongne

Vox
October 11, 2011

A Greek default is widely expected. This column outlines a “win-win” strategy for restructuring Greek debt that it argues would minimise the impact of a default and buy Greece and the rest of Europe some precious time.

Needless to say, Greece is in a bad shape.

• At the end of September, its two-year interest rate rose up to more than 70%.
• Greek default is increasingly anticipated by markets – an expectation that is partly self-fulfilling; and
• Default may not solve all of Greece’s problems, since private investors may be reluctant to buy some Greek debt in the future.

Yet, taking default anticipations into account, there is a simple mechanism that could help. It would reassure private investors and give Greece the opportunity of implementing structural reforms – thus allowing expectations to be based on the reforms rather than self-fulfilling prophecies.

The problem with default is that all private debt holders are likely to be penalised, including the ones that would trust Greece and buy some newly issued debt. If all private investors are penalised when default happens, then all potential private investors may be reluctant to lend in the future.

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