Greek Debt Must Be Wiped Clean
Financial markets are beginning to feel a little more relaxed about the future of the euro, but there is a critical missing element in the current policy discussion. With attention focused on Spain’s larger-scale problems, it would be easy to forget that Greece is still on an unsustainable path, with no solution in sight.
The story starts back in May 2010 when Greece, clearly insolvent, was treated as if it was merely illiquid and just needed more time to reduce its excessive government debt. It was insolvent not just because the debt was large, but because there was no realistic prospect that the Greek political process could make the herculean policy changes required.
Since then the debt has been ‘kicked down the road’ in various ways, with the main effect being to transfer most of it from the private sector to various parts of the European official sector (including the European Central Bank). It’s not surprising that the European decision-making process favoured this flabby non-solution, but a well-functioning IMF would have stood its ground and insisted on a fundamental rescheduling (de facto default) at that stage.
This would have changed the politics in a beneficial way. Default would have damaged French and German bank balance sheets, but the taxpayers of those countries would have been more ready to support their banks than to assist the feckless Greeks. In Athens, without the ability to borrow, the government would have had to run a balanced budget. Pensioners and public servants would have been demonstrating on the streets, but rather than criticising the IMF, they would have been demanding that taxes should be collected so that they in turn could receive their salaries and pensions.