A better deal for Greece is possible

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By Barry Eichengreen, Peter Allen & Gary Evans

in ekathimerini.gr  Greece,  July 27, 20156

Greece’s debt is unsustainable. The International Monetary Fund has said so, and it’s hard to find anyone who disagrees. The Greek government sees structural reform without debt reduction as politically and economically toxic. The main governing party, SYRIZA, has made debt reduction a central plank of its electoral platform and will find it hard to hold on to power — much less implement painful structural measures — absent this achievement.

Moreover, tax increases and spending cuts by themselves will only deepen the Greek slump. Other measures are needed to attract the investment required to jump-start growth. Reducing the debt and its implicit claim on future incomes is an obvious first step.

But German Finance Minister Wolfgang Schaeuble and Chancellor Angela Merkel refuse to consider any cut in the nominal stock of Greece’s debt to the European Union. They refuse to agree to debt-service reductions without prior structural reforms. In their view, lower interest rates, grace periods and more generous amortization terms should be a reward for prior action on the structural front. If they are offered now, Greece will only be let off the hook.

There’s an obvious way of squaring this circle: Greece and the EU should contractually link changes in the terms of the country’s EU loans to milestones in structural reform. Think of the result as structural-reform-indexed (SRI) loans, akin to former Greek Finance Minister Yanis Varoufakis’s gross-domestic- product-indexed bonds.

Under the new loan terms, if Greece implements more reforms, future interest payments would be permanently lower and principal payments would be extended indefinitely. Full implementation of the specified reforms would turn Greece’s debt into the equivalent of zero-coupon, infinitely lived bonds that drain little if anything from the public purse.

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