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Greece vs Ukraine: The issue of debt restructuring

 3 min read / 

On July 14th 2015, the International Monetary Fund declared that Greek debt was not sustainable. A new bailout was found on August 14th, the 3rd one, which had been rejected by the referendum a couple of weeks ago. But does this actually help Greece?

Not really as any debt needs to be paid back. Besides, as bailout comes along with austerity measures, GDP is much lower than before the crisis. This austerity, a mix of tight fiscal, budgetary and monetary policies, creates debt deflation, giving debt a larger impact, as the ratio debt/GDP increases more than proportionally. Kenneth Rogoff, Professor at Harvard University, claimed in favour of a debt restructuring. Greece will not be able to pay everything back. And offering it more money just increases the pressure. Why has it not be done yet ?

Ukraine just signed an agreement which allows the cancellation of 20% of its debt, which represents around $3.6 billion, along with an extension of the repayment period of 4 years. All along with a slight increase of its interest rates, from 7.20% to 7.75%, Ukraine should be able to borrow again on the financial markets by 2017. This means more stability in the economy and more confidence for investors. Last but not least, this would show some solidarity between the Eurozone members, who are not currently playing by the rules and rather trying to get the more advantages for their nation.

This is exactly what Greece needs. The risk of default is high, as the Troïka will not be for ever able of offering bailout funds. And a default would be worse that a partial debt cancellation. The whole debt does not need to be cancelled, around 20% would already be a good start and this would trigger financial benefits, as explained by Lucas Papademos. This comes naturally along with strict measures protecting the Eurozone stability.

Another impact of a debt cancellation, as proven by the Ukrainian case, is that it puts the country in a more powerful position. Ukraine ends up reinforced in the crisis with Russia. Greece could end up more powerful and more confident toward the Eurozone, and this could be beneficial to its whole economy.

Obviously, a debt restructuring triggers structural reforms that need to be progressively implemented and more adapted than were the one demanded by the Troïka. The tax system needs to be changed and an actual comparative advantage needs to be found, and it should not be external like tourism. Last issue, a control of its public finance should be introduced to make sure that the commitments would be met, as the issue of corruption remains on the stage.

It is high time to give up on some part of the Greek debt and let it (and the Eurozone) start all over again.

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