The Case for Greek Amnesty

Greece owes roughly €320 billion in foreign debt. In February 2015, the Greek   government agreed to a repayment plan in order to address the loans it received in 2010 and 2012. These loans were to be used to ease the economic recession austerity measures propagated. In July, when Greek citizens voted against the repayment conditions the European Union set before them, Greek government and banks risked running out of funds for essential operations. The third and most recent Greek bailout plan, a package designed to prevent the country from financial collapse, is worth €86 billion. The Troika had collectively dictated the terms of the prior two bailout packages, but the most recent bailout saw the absence of one member. The IMF was not a supporter of the most recent agreement; rather, managing director Christine Lagarde declared the IMF would not “get involved until Greece receives significant debt relief from creditors” (Petroff 2015). It is widely believed among IMF directors that it is unrealistic for Greece to completely repay its debt without assistance.

A “debt overhang” refers to a debt that is so large, that it is no longer viable to take on additional debt to finance future projects; increasing Greece’s debt by granting them more loans in exchange for austerity measures is not economically beneficial. By any measure, Greece has a debt overhang.  Any progress that Greece may observe from an improving economy, or from a stimulus package, will be automatically redirected towards loan repayment. The government and financial sector will never have the chance to benefit from such progress and will maintain their current state of stagnant or negative growth as a result of their debt obligations. This increases the likelihood of default, and creditors would bear this increased risk. Domestic and foreign investment would fall; additional investments would not seem valuable as that investment would be redirected towards previous debt holders.

While previous creditors may view this as temporarily advantageous, as Greece will be focusing on repayment, Greece will see no gain in simply redirecting the majority of their funds towards their debt service instead of reinvesting in themselves for future economic improvement and stability. After a certain point, investors will see no gain in investing in a stagnating economy and Greece will be unable to generate any currency. Greece will find it economically rational to default on their loans. Creditor nations will be left with the amount Greece was able to repay them during that time period. It has been suggested that in cases where a country has surpassed their debt overhang, debt forgiveness will be beneficial for creditors as it decreases the risk of the debtor nation defaulting.

A debt reduction—a “haircut”—, also known as debt forgiveness or relief, would be the more efficient and realistic action to follow. Debt forgiveness allows for the creditor nations to receive some repayment sooner rather than no repayment later. Greek haircuts allow countries to receive repayments of their loans in shorter amounts of time while providing Greece a more reasonable repayment schedule. Even though this may not be a desireable agreement for the Germans, it would be manageable given the size of their economy and the Greek debt. Debt reductions also allow EU member countries to assist Greece in their economic woes while also preventing them from further neglecting the Maastricht treaty.

According to the “no bailout” clause written in the Maastricht treaty (article 125), it is illegal for one member country to assume the debts of another member country. In 2010, Greece’s previously stated government deficit was proven to be fabricated, and instead of the 6-8% presented figure, the deficit was revealed to be 12.7% of GDP. That year, the IMF along with other eurozone countries agreed to a €110 billion bailout package, consisting of loans, in exchange for austerity measures. This first bailout failed to provide the growth and stimulus to the private sector they hoped. As a result, the creditor nations extended the terms of the bailout and provided an additional €109 billion package. Greece’s economy did not respond as fast as Greece and the creditor nations anticipated, causing the creditor nations to further supply more funds. As stated by prominent economist Paul Krugman, “it is true that Greece voluntarily borrowed vast sums. It’s also true, however, that banks in Germany and elsewhere voluntarily lent Greece all that money.” While the Greek government and citizens will suffer as a result of its failure to properly promote sustainable economic growth, creditor nations willingly broke the specified bailout clause of their treaty, and therefore should also share some of the burden due to their negligent lending practices.

If Greece were somehow able to achieve a primary surplus of 4.5% (a former repayment measure dictated by the Troika), which is roughly equivalent to €8.882 billion, they would have to maintain this for approximately 36 years in order to pay back their debts. In 2014, Greece accomplished a primary surplus of only €1.9 billion. At this pace, it would take the country 168 years to repay the loans in full. During these repayment periods, Greece will be expected to maintain austerity measures—decreased government spending and an increase in the level of taxes. Both of these numbers represent impossible and unrealistic scenarios aimed at solving Greece’s foreign debt problem. Greece, with its current economic state and policies, would never be able to maintain a primary surplus of 4.5% for such a prolonged duration of time, while the creditors would never agree to a payment plan that would see their money returned in over 150 years. If creditor nations desire to see any part of their loans repaid in a timely manner, debt reductions may be the only viable option they have.