Debt write-off as a mechanism to incentivize structural reforms

Greece’s public debt is projected to rise to 189% of GDP in 2013. This debt level is unsustainable and a write-off will be needed. Some among Greece’s foreign partners are concerned that a write-off will ease the pressure on Greek politicians to reform the economy. The populist rhetoric of Greek opposition parties, who demand a write-off but reject reforms, strengthens these concerns. At the same time, a write-off is unavoidable, and continuing uncertainty on how the debt problem will be solved sinks the Greek economy further into depression and makes a chaotic default more likely. In recent articles in Bloomberg and Kathimerini, Costas Meghir, Dimitri Vayanos and Nikos Vettas argue that a debt write-off can be designed in a way to incentivize reforms. A fraction of the officially held debt, e.g., 50%, should be set aside to be written off gradually over the next five years or so conditional on Greece achieving a set of milestones concerning institutional and market reforms. Greece’s partners should devise a clear strategy that ensures the Greece’s debt becomes viable, while also promoting a thorough reform of the economy.

The Bloomberg article, titled “Greece needs growth, not austerity”, here, and the Kathimerini article, titled “Διαγραφή χρέους ως μοχλός για δομικές μεταρρυθμίσεις”,  here. A Kathimerini article written by the same authors 1.5 year ago and proposing gradual debt write-off in exchange for reforms here, and the corresponding post on this blog here. A recent article in the Economist magazine with the same proposal here.

About D_Vayanos

London School of Economics

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