A Greek default is not the answer

In today’s vibrant media world, quick and stark assessments are called for. One currently doing the rounds  is that Greece will not be able to survive economically if it doesn’t restructure its debt. Restructuring, by the way, means reducing debt – be it by cutting interest rates on government bonds, extending maturities or by enforcing an outright haircut - it all amounts to a lower net present value of the asset held by the creditors.

One of the motives behind calls for a debt write-off is to make private investors shoulder some of the restructuring costs - be it savers, fundholders, institutional investors like pension funds and insurance companies, or, of course, hedge funds and banks. But at this point, it should be noted that debt waivers can hardly be enforced only on certain groups of creditors. So calling for debt waivers automatically pulls the taxpayer into the equation, because loans of European governments to Greece would also have to be written off partially. The first best solution for the taxpayer – and this sometimes seems to be forgotten –  is if the situation in Greece is successfully stabilized and the debts, together with interest, are paid back in full.

So can Greece pull this off? The answer is yes. Even this crisis can be mastered by taking the right action, and taking it rigorously. There is no point in throwing in the towel before the measures put together by both the Greek government and the EU/IMF have even had time to take effect. Suggestive back-of-the envelope calculations which supposedly illustrate the impossibility of a solution do not help. What is needed is a differentiated analysis of the fiscal picture in Greece and the experiences of other countries in a similar predicament.

Dr. Michael Heise

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