Breaking the Greek debt impasse

by Barry Eichengreen, Peter Allen & Gary Evans

Vox
September 7, 2015

Greece needs debt restructuring. Yet, to get debt reduction, the Greek government is required to implement structural reforms. This column proposes a way to square the circle by introducing a Structural Reform Index in Greek loan contracts. The central feature of the proposal is the linkage of debt relief to progress in structural reforms. The features and conditions of the proposal should make it desirable both for Greece and the German government and other creditors.

Greek debt restructuring and structural reforms

Greece needs debt restructuring. On this, a growing chorus of voices is agreed (Manasse 2015, Taylor 2015). Even the IMF (2015) now acknowledges that Greece’s debt is unsustainable. Restructuring is required, it now insists, for the workability of the third programme between the country and ‘the institutions’ that is currently being finalised.

Yet, the German government refuses to agree to debt reduction absent evidence of prior structural reform. Debt reduction should be a reward, it insists, for prior action on the structural front. If it is offered now, the Greeks will be let off the hook, and the incentive to proceed with hard structural measures will be blunted.

Greek politicians – and many of their voters – insist to the contrary that they deserve a credible promise of debt reduction and restructuring now. Absent such a promise, they are reluctant to commit to painful structural reforms. In the presence of a crushing debt burden, they argue that they have already suffered enough.

Others like the IMF, putting considerations of fairness aside, imply that the third adjustment programme is doomed to fail absent an up-front commitment to restructuring. The Fund appears to be prepared to condition its financial participation in that programme on a German concession on the issue.

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