Some choices to sort the Greek out


Source | It would appear that all of a sudden, the question of what will become of the Greek debt (currently at 170% of the country’s GDP) has arisen. While everyone seemingly had forgotten about it over the past couple of months with the Troika negotiations going on, now long talks and negotiations between the IMF and the European Union are taking place to settle this issue.

German Finance Minister Wolfgang Schäuble is strongly opposing IMF chief Christine Lagarde, who proposes that Germany creditors and others forgive a portion of Greece’s debt in order for it to become sustainable. Such a development would mean that Germany’s fears about not being able to protect the German taxpayer, whose money was used to finance Greek deficits, would materialize in the worst possible way.

From what we can read, Schäuble will propose that a solution for reducing the debt levels would be for the Greek government to buy back 50% of the remaining private sector debt at a 25% of its value. This would mean that if a bank or any other investor had bought Greek bonds of €100, after last year’s haircut the bonds are only worth €21. Under Schäuble’s plan, the investor would essentially sell the bonds for approximately €5. This would essentially mean that 50% of the investors would lose approximately 95% of their invested money. (Nevertheless, as it appears that this piece of news only appeared in Greek media, we would have serious thoughts about its validity)

Yet, as a compromise has not been reached yet, the question remains: how will the Greek debt be reduced to bearable levels? There are only two simple solutions which come to our mind:

1. Interest payments for the outstanding public debt should be paused for a period of 5 years.

This would allow Greece to use its primary surplus to finance its current needs as well as repay a portion of the current debt load. The Greek statistical service reports that the country will need to repay approximately €55 billion of debt in the next 5 years; giving it the opportunity not to pay any interest rates in the next 5 years would mean that Greece could return to growth in 2014-2015 and then make it easier for the nation to cover its loans.

This way, the German taxpayer (or any other taxpayer in the EU) does not have to worry about losing her money; she would just receive less profit on the amount loaned.

2. The ECB should directly fund any financial needs Greece has from now on.

By doing this, it would mean that no taxpayer in any country will be worried about her government losing her hard-worked money due to Greece. By having the ECB fund the debt, the country would have to pay much less interest rates than otherwise, and this would lead to an opportunity for a quicker repayment of debt.

Solution 1 is actually easier to be implemented than solution 2, with the added advantage that it will bring results much sooner than its alternatives. Given that the prerequisite for countries to approve of a solution is that they will not lose any money of those they have invested so far, they should take this into serious consideration.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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