By Mr. Mark Whitehouse, Bloomberg View. He writes editorials on global economics and finance. He was previously at the Wall Street Journal, where he covered economics in New York and served as a deputy bureau chief in London. He was also the founding managing editor of Vedomosti, a Russian-language business daily. He was part of a team that won a Pulitzer Prize for international reporting on Russia in 1999.
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European leaders are belatedly coming to a crucial understanding: Greece’s debt burden is too much to bear. As they consider whether to provide relief, they should keep in mind how the country ended up owing their governments so much in the first place.
Let’s go back to 2010, when Greece’s government — having blown its own budget projections — found itself at the epicenter of the European financial crisis. Private investors, including big, thinly capitalized German and French banks, held pretty much all of Greece’s sovereign debt. This presented Europe’s leaders with a choice: Lend Greece the money needed to satisfy creditors, or let Greece default — in which case Germany and France might face the politically fraught prospect of bailing out their banks directly.
Europe’s governments opted to lend to Greece, imposing belt-tightening measures purported to improve the chances of getting their money back. The austerity sent the economy into such a deep slump that — despite a private-debt restructuring that finally happened in 2012 — the government became increasingly dependent on so-called official creditors to make ends meet, putting it on the path of serial confrontations and bailout deals that has brought the country to its current predicament. Here’s a chart showing how bailout loans replaced private financing from 2009 through early 2016:
One can’t help but wonder what would have happened if Europe had opted for a full reckoning early on, letting Greece renege on private debts and moving quickly to recapitalize banks. Greece would almost certainly have been better off: The government would have been able to stabilize its finances with much less economic damage, possibly averting the political upheavals that almost forced Greece out of the euro area. The broader European economy would probably have benefited, too, avoiding much of the banking paralysis that plagues it to this day. Greece’s debts to European governments, if they existed at all, would be smaller.
In other words, Europe’s leaders made decisions that have now left their taxpayers on the hook. As the region’s finance ministers — at meetings in Japan this week and Belgium next week — try to figure out how to address Greece’s overwhelming debts, they should recognize the extent to which they (or their predecessors) are responsible.
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