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Debt relief now

Monday, May 16, 2016  |   |  Tags:

In case you missed it, The New York Times recently published an editorial calling on European leaders to offer Greece some measure of debt relief in acknowledgment of the catastrophic effects of austerity on the Greek people:

It’s the season when Greece’s continuing debt saga approaches what has now become a familiar summer climax, with citizens protesting austerity cuts and international creditors squabbling over the terms of loans. It’s time to exit this cycle and face reality: Without relief, Greece’s economy will never recover, with repercussions the European Union can ill afford. […]

Last year, Germany threatened to oust Greece from the European Union and the euro if it didn’t deliver on austerity measures. Given Greece’s front-line position in Europe’s refugee crisis, Germany can no longer afford to threaten Greece. The last thing Europe needs is a “failed state,” as Greece’s finance minister, Euclid Tsakalotos, warned on Saturday, on its border with Turkey.

When Europe’s finance ministers reconvene, they would do well — for Greece, for the European Union and for Germany — to approve the July release of funds and agree to debt relief. Greece has gone a long way to satisfy austerity demands, but without debt relief its crisis will never end.

It’s not just The New York Times. Last week, Bloomberg news also published an editorial calling for debt relief, saying that no other solution is sustainable:

To be clear, this isn’t a question of letting Greece off the hook. The mess it’s in is the country’s own fault — and Greeks have paid the price in collapsing living standards. More realistic fiscal targets of the kind the IMF is proposing, including a primary surplus of 1.5 percent of GDP, would still impose austerity on a country that’s suffered greatly. But this softer target wouldn’t cut debt to a sustainable level: Resolving this issue requires debt relief.

For many months, the euro zone governments, led by Germany, have been led by domestic politics to deny this inescapable reality. Greece has to make big repayments soon. As long as the issue is unresolved, the threat of another financial crisis will cloud Europe’s prospects. The IMF is right to say that enough is enough.

Bloomberg’s editors have been calling for debt relief since last summer.

Greece’s Finance Minister Euclid Tsakalotos has increased the urgency of debt relief, correctly pointing out that “Nobody should believe that another Greek crisis, leading perhaps to another failed state in the region, could be beneficial to anyone,” Mr Tsakalotos said in a letter to creditors urging them to take steps to ease Greece’s crippling debt burden.” The administration of Prime Minister Alexis Tsipras has also made debt relief a centerpiece of its public commentary on the latest debt deal negotiations:

“We want real solutions, not interim solutions,” Nikos Pappas, Greece’s Minister of State, said in an interview Friday after several days of talks with senior U.S. officials. “No more kicking the can down the road.”

Greece has the International Monetary Fund (the IMF) on its side and the US Secretary of State John Lew, who has joined the Obama administration in calling for debt relief. On Sunday, Greek pariament will vote on a slew of new tax increases and reforms demanded by international lenders, and hopes that these measures will persuade the rest of its lenders to agree to much-needed debt relief.

Over four years ago, we wrote here on the HALC blog about the need for debt relief, and how any other program focused primarily on austerity was meant to save Europe, not Greece:

In the Prometheus legend, Zeus punished Prometheus by chaining him to a rock. Every day, a giant eagle would descend and eat his liver, and every night his liver would regenerate. In the morning, the eagle would descend to feast again, condemning Prometheus to an agonizing, eternal cycle of being eaten alive on daily basis.The day after Greece passed another slash and burn austerity package, the giant eagles descended again. German Chancellor Angela Merkelstressed that the new package was an “important step” but stood resolute against any future easing of austerity measures. Meanwhile, European Central Bank Council member Ewala Nowothy said that “future steps were needed” before the ECB would release the next tranche of funds.

There will always be “steps” that Greece must take to satisfy foreign creditors and fellow eurozone members. Yet steps toward what? Nobel prize winning economist Paul Krugman has stated flatly that Greece will default, pointing out that the country has already defaulted on its debts and proclaiming the situation in Greece to be “essentially impossible.”

The goal of each draconian step now is not to save Greece but to contain her. As Floyd Morrisreported in The New York Times, “Europe is prepared to pay what it needs to save its banks. But not to rescue Greece.” A leaked German memo, Morris points out, emphasizes the desire that Greek revenues “are to be used first and foremost for debt service.”  Indeed, an analysis last fall revealed that most bailout funds received by Greece went to pay off European bondholders, not to help the people of Greece or to directly stimulate Greece’s economy.

As we approach the endgame, it’s become clear that the recent measures demanded of Greece were less about saving her people than about buying time for the eurozone to fortify itself against a Greek default.

Four years later, the people of Greece are still suffering (to get a sense of that suffering, read this piece at The Huffington Post which provides a depressing glimpse into just what the clinical term of “austerity” means for ordinary Greeks).

In a just-released white paper from the European School of Management and Technology, Jörg Rocholl and Axel Stahmer crunch the numbers and find that in the first two bailouts, 95% of the bailout funds went to purposes outside of stimulating the Greek economy. Importantly, in evaluating the current bailout program, they find that the latest program structurally mirrors that of the first two: “[t]he major part of the programme serves again to cover the debt repayment and interest payment to existing creditors, this time mainly the European Central Bank (ECB) and the IMF.”

Greece and Europe cannot endure this merry-go-round economic policy any longer. If European leaders are truly interested in a stronger EU, they must work to restructure Greece’s debt burden.



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