Argue about the details all you want, but there’s no doubting the need for debt relief, and quickly.
By ALBERTO GALLO, Wall Street Journal
Ever since Greece’s privately held debt was restructured in 2012, the country’s public creditors have diligently avoided discussing the subject of debt relief. Until now. On May 24, the 18 eurozone finance ministers, known as the eurogroup, will convene to consider reducing Athens’s debt load. It’s a start, but to be effective the eurogroup will need to do much better than what they’re currently prepared to offer.
There’s little doubt that Greek debt needs restructuring. The latest projections show the country’s debt-to-GDP ratio could rise to more than 250% by 2060 from its current level of 177%. Finding a solution would be the most economic and rational choice for creditors. The cost would be relatively small. The Greek economy, at 2% of eurozone gross domestic product, is roughly the same size as Milan or Düsseldorf. Relief for Greece’s €200 billion ($228 billion) of government loans, or approximately 75% of total debt, would be manageable. Even a much-feared haircut would cost less than 0.1% of eurozone GDP over 10 years.
The risks of leaving the problem unsolved far outweigh the cost of fixing it. Greek unemployment and social unrest are on the rise, as is support for extremist parties such as the neo-Nazi Golden Dawn. Continued stagnation could eventually topple the fragile majority held by Prime Minister Alexis Tsipras, who managed to pass the latest reforms with a margin of just three votes. There could also be a return to contagion fears over a possible exit from the eurozone. For want of regional support, Greece might seek to strengthen its ties with Russia.
It shouldn’t be overlooked that Athens has lately been making a real effort to achieve its budget targets. This week, Parliament approved additional measures to slash its budget by €5.4 billion. More is needed, in particular to reduce pension expenditures, currently the highest in Europe at more than 15% of GDP. Also waiting to be addressed are the inefficiencies in the legal system—the slowest in Europe, according to the World Bank—rampant tax evasion, and the highest level of military spending in Europe. Yet with 50% unemployment among young Greeks, more than 400,000 refugees arriving by sea over the past few years, and with its economy reduced to 75% of its precrisis size, Greece deserves not a blank check but at least some credit.
What the eurogroup is offering, however, is insufficient. A document prepared by European Union institutions and seen by The Wall Street Journal this week suggests that creditors would use a variety of small measures, including maturity extensions, limits to coupon payments and the reimbursement of profits on Greek bonds by the European Central Bank to bring the debt-to-GDP ratio down by 31 percentage points. But here’s the catch: The plan would be conditional on more budget cuts and would only begin to take effect in 2018. That’s too little, too late.
Creditors fear that if they extend a better offer to Greece, other eurozone countries may ask for similar leeway. That may be a fair concern given that voters in other countries that suffered crises and underwent significant budget reforms have thrown significant support behind politicians pledging to unwind reforms and fiscal discipline. But debt relief can be implemented over time and supplied on predefined terms and conditions, not as a free lunch.
There is also concern that concessions to Greece may swing the results of the June 23 referendum in the U.K. on whether to leave the EU, or affect next year’s general elections in Germany. Both the leave campaign in the U.K. and Alternative for Germany (AfD), a right-wing euroskeptic party, have opposed further aid for other economies at the expense of taxpayers in Britain and Germany. AfD has been gaining ground over Chancellor Angela Merkel’s center-right coalition and is currently polling over 15%.
Leaders in both Greece and Germany are walking a fine line, managing a prolonged negotiation process while trying to keep domestic populist pressure at bay. Against this backdrop, delaying the debt-relief question could be politically easier than reaching a comprehensive solution. But it’s in everyone’s interest to face the problem now: Debt restructuring could give creditors a higher chance of recovering their capital while giving Greece a fresh start.
There are many possible solutions. These include countercyclical bonds with interest payments linked to economic performance, a more active role for the European Stability Mechanism, and a common fiscal policy. Building these tools is vital both for Greece and for the eurozone itself, to face future emergencies across the vastly different economies of its members. After eight long years of crisis, it’s time to give Greece the help it needs and to focus on building a stronger Europe.
Mr. Gallo is portfolio manager and head of macro strategies at Algebris Investments.
