Hellenic Haircut?

Greek Drama's Two Endings

Whether or not to help Greece?
  • Why it matters

    Why it matters

    After Greece is de facto bankrupt and voters rejected a new bailout package, the euro zone is pressed to take a final call on the country’s debt.

  • Facts


    • Supporters of a debt haircut argue that the move is economically and politically necessary.
    • Opponents counter that Greece needs fundamental reforms instead of debt relief.
    • All 28 European Union countries will come together for final negotiations on Sunday.
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Go for it!

“Before us lies an inefficient, jobless and disorganized Europe being torn apart by inner turmoil and international hatred as it fights, starves, pillages and lies.”

With these dramatic words, British economist John Maynard Keynes called for Germany’s debt to be waived at the Versailles Peace Conference after the end of the First World War.

We were recently reminded of his argument by Amartya Sen, Nobel Prize Laureate in Economics. Fortunately, most of Europe is a long way from such misery, although Greece seems to be nearing it.

Keynes’ insight that it can be devastating to demand the impossible of a debtor was true back then and it still is today. Greece is incapable of paying off its mountain of debt, €317 billion in total. The International Monetary Fund described the current repayment schedule, ending in 2057, as unrealistic and has proposed an extension. Greek debt relief is therefore both economically and politically necessary. It will happen in any case, whether it’s arranged within the euro zone or enforced by a Grexit.

“Hold on,” say opponents, “a debt reduction at the present time wouldn’t mean much financial relief for Athens anyway. Greece is not obliged to begin repaying its euro-zone partners until 2020 and the European Financial Stability Facility until 2023 for their loans.”

But this doesn’t apply to the roughly €40 billion that Greece owes the European Central Bank and the IMF. So Greece would regain some financial leeway through debt relief, now and even more so in the future.

What doesn’t go towards repaying principal and interest can be used for investments or rebuilding the state and the economy. It is Greece’s task to ensure this happens – and that must be a condition for reducing debt.

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