Greece should restructure its debt now!

In an article titled “Greece should restructure its debt now!” and published in Kathimerini on 25 September 2011, Nicholas Economides starts with the observation that Greece is unable to pay even the interest on its €280 billion private debt and €70 billion debt to EU country members and the IMF. At the present, the annual interest payments alone are 20-28% of annual Greek government receipts. Τhe Greek government should state to its EU partners its inability to pay and ask for a 50-60% haircut that would reduce its debt to manageable levels. In exchange for the haircut, bondholders will receive higher quality bonds that would have their face value guaranteed by the EFSF or by a purchase of high quality bonds by Greece. The costs of this solution are relatively small compared to the size of the Eurozone, and thus the solution may be preferable to the EU compared to a long term crisis that threatens to spread to larger countries such as Italy and Spain. Greek and other EU banks should recapitalize immediately, besides the liquidity support they receive from the Bank of Greece and the ECB.

The Kathimerini article is available here, and an English translation is available here. Related posts on this blog by the same author are available here, here, here and here.

About N_Economides

New York University

This entry was posted in Banking and finance, Europe, Macroeconomics, Public finance. Bookmark the permalink.

2 Responses to Greece should restructure its debt now!

  1. Stan Squires says:

    I am from vancouver,canada and i wanted to comment on the crisis in Greece.This is not a new problem.In europe during the 1800s the same problems arose in England and France.The same problems has continued since then.Capitalism is at the root of these problems.Things are done independent of the will of the people.In the factories the workers try to keep up to the machines or in other words the machines runs the people.The stock exchange operates independently of the people.As a result nothing is planned.
    The working class got no say in this process so there should be no concessions from them.Only when the working class takes political power into their own hands will these problems be solved.

  2. That Greece no longer can afford to service her sovereign debt is apparently obvious to everyone except EU-decision makers. Nevertheless, I wish people would stop talking about haircuts! Rescheduling debt and a haircut are 2 separte issues. The former is the most natural thing in the world when a country confronts external payment problems. The latter should be considered as a no-no for Greece. Look at financial history to see where haircuts were made on sovereign debt: either countries of the 3rd world who had no hope of every achieving a decent national income or countries which had experienced a one-time destruction and required rebuilding.

    A 3-year economic/financial crisis is far too short a period to offer Greece, as an EU-member a country of the 1st world, a haircut. That can still be done in 20-30 years’ time.

    Of course, Greece cannot service her present debt levels but there are other ways to correct this problem without having to forgive sovereign debt.

    If Greece indeed requires a 50% haircut (which economists now seem to agree), the solution is the reschedule maturities of principal and interest of 50% of her debt out to, say, 30 years. That way, no debt service costs run through the budget on that amount.

    Another 30% could be rescheduled out to 20 years with interest capitalized during the firsts 10 years. And the remaining 20% out to 10 years with interest payable from the start. This is a matter of proper structuring: the debt service burden on the budget must be high enough so that pressure on reforms does not wither away but it must not be so high that it becomes unbearable.

    http://klauskastner.blogspot.com/2011/09/default-bankruptcy-etc.html

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