(B) The Greek debt crisis started over a year ago. And Europe does not seem close to a resolution. It is even worse: the opportunity for the European leaders to avoid a terrible disaster is quickly shrinking. The consequences for Europe and the rest of the world of Greece defaulting on its debt will be disastrous leading without a doubt to another financial crisis, and a global economic recession similar to the ones that we had in 2008. And, we are getting extremely close to that unacceptable point of no return.
Greece is insolvent. Its public debt is 160% of its GDP. However, European leaders, instead of considering it as a solvency crisis, have considered it as a liquidity crisis, lending more with the help of the IMF to Greece, and asking for more austerity measures that the Greek do not seem to accept.
At this point in time, there are only two possible outcomes: Greece defaults on its debt – the most likely scenario as of today – or an orderly restructuring of its debt is being proposed, if European leaders act quickly, that could save Greece, the Eurozone, and the world economies.
Professor Nouriel Roubini has clearly articulated how to propose an orderly restructuring of the Greek debt:
“If the PIIGS (Portugal Ireland Italy Greece and Spain) can’t inflate, grow, devalue, or save their way out of their problems, Plan A is either failing or is bound to fail. The only alternative is to shift quickly to Plan B – an orderly restructuring and reduction of the debts of these countries’ governments, households, and banks.
One can carry out an orderly rescheduling of the PIIGS’s public debts without actually reducing the principal amount owed. This means extending the maturity dates of debts and reducing the interest rate on the new debt to levels much lower than currently unsustainable market rates. This solution limits the risk of contagion and the potential losses that financial institutions would bear if the value of debt principal were reduced.
Policymakers should also consider innovations used to help debt-burdened developing countries in the 1980s and 1990s. For example, bondholders could be encouraged to exchange existing bonds for GDP-linked bonds, which offer payouts pegged to future economic growth. In effect, these instruments turn creditors into shareholders in a country’s economy, entitling them to a portion of its future profits while temporarily reducing its debt burden.
Reducing the face value of mortgages and providing the upside – in case home prices were to rise in the long run – to the creditor banks is another way to convert mortgage debt partly into shareholder equity. Bank bonds could also be reduced and converted into equity, which would both avert a government takeover of banks and prevent socialization of bank losses from causing a sovereign debt crisis…
The creditors and bondholders who lent the money in the first place must carry their share of the burden, for the sake of the PIIGS, the EU, and their own bottom lines.”
After the financial crisis of 2008, the West cannot afford further economic crisis. And it goes without saying it, that an orderly restructuring of the Greek debt requires a stronger Europe, that includes not only a monetary union but also both a fiscal and political union, and that every European country will have to share the burden of the Greek debt.
Nouriel Roubini and Stephen Mill, “A Loan and a Prayer”, Project Syndicate
Joschka Fisher, “Does Europe have a Death Wish?”, Project Syndicate
The Economist, “If Greece goes...”
A Silicon Valley Insider, “The Public Debts of the Developed Nations Could Well Lead to the Next Financial Crisis”
Note: the picture above is “The Venus de Milo” from Le Louvre.
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