{"id":17395,"date":"2018-06-03T18:20:16","date_gmt":"2018-06-03T15:20:16","guid":{"rendered":"https:\/\/bestinsurance.gr\/a1\/?p=17395"},"modified":"2018-06-03T18:20:16","modified_gmt":"2018-06-03T15:20:16","slug":"wikileaks-controversy-strengthens-case-for-greek-debt-forgiveness","status":"publish","type":"post","link":"https:\/\/bestinsurance.gr\/a1\/archives\/17395","title":{"rendered":"WikiLeaks Controversy Strengthens Case for Greek Debt Forgiveness"},"content":{"rendered":"
\n

By Mohamed A. El-Erian <\/a><\/p>\n

Creditors need to accept a haircut for the sake of Europe.<\/div>\n

(Bloomberg View) —<\/span><\/section>\n

The release this weekend by WikiLeaks of the purported transcript of discussions<\/a> among International Monetary Fund officials about the best way to compel Greece’s creditors<\/a> to accept debt restructuring led to much finger pointing and seeming indignation.<\/p>\n

QuickTake<\/span> Greece’s Financial Odyssey<\/span><\/a><\/p>\n

Yet the economic case for forgiving that country’s debt is straightforward: Without\u00a0relief within a comprehensive reform program, Greece<\/a> will\u00a0struggle to grow, unemployment will remain high, and the turmoil will\u00a0continue to periodically challenge the functioning of the euro zone.<\/p>\n

The political calculus is a lot harder, however. Even the window opened by Europe\u2019s refugee crisis<\/a> is failing to provide a sufficient catalyst for change. If that\u00a0continues, Greece could end up an element of a much larger threat to\u00a0the integrity and performance of both the euro zone and the European Union.<\/p>\n

Debt forgiveness is never granted easily, and with good reason. Even when\u00a0it is a financially viable solution, the concept raises fundamental issues of fairness and\u00a0incentive-compatibility.<\/p>\n

Why should a deadbeat debtor be granted relief when others have labored\u00a0to pay off their debt? What about the creditors who worked hard to earn the\u00a0money that they lent; why should they be punished? And doesn’t the\u00a0granting of debt forgiveness encourage other debtors to be less diligent, potentially undermining the overall flow of credit that supports\u00a0economic growth and broader opportunities for well-being and prosperity?<\/p>\n

These are legitimate economic questions. Over time, such considerations have\u00a0rightly made debt forgiveness rare, subject to protracted negotiations or dependent on the outcome of other truly exceptional events. But the economic\u00a0analysis also suggests that\u00a0there are a few cases when debt forgiveness is in fact the better option when a\u00a0“first best” solution isn\u2019t available.<\/p>\n

Here is the economic argument:<\/p>\n

Beyond a certain point, high indebtedness does more than crush directly the\u00a0recovery efforts of the debtor. It also inhibits new capital from coming in\u00a0as fresh providers rightly worry about being contaminated by what is already\u00a0an excessive existing liability. Without the much-needed oxygen provided by\u00a0capital inflows, the debtor suffers even more, rendering growth almost\u00a0impossible and making the debt trap even deeper.<\/p>\n

Historical examples include the hard lessons of Latin America’s\u00a0“lost decade” of the 1980s. During this particularly sad episode, many\u00a0countries struggled to overcome crushing debt burdens and ended\u00a0up with prolonged economic stagnation, high long-term unemployment and rising poverty\u00a0levels. The comprehensive debt relief that finally came at the end of the decade and in\u00a0the early 1990s was too late to avoid misery, especially for the poorest\u00a0citizens. There also is the example of poor countries in Africa, which benefited from a\u00a0cooperative global Debt Initiative for Heavily Indebted Poor Countries in the mid-1990s that allowed a notable pickup in their growth, investment and poverty alleviation.<\/p>\n

Most economists agree that Greece<\/a> will not be able to grow without debt\u00a0forgiveness. It is a necessary, though not sufficient, component of\u00a0almost any approach to restoring the country to a sustainable growth path, reducing alarming levels of joblessness and avoiding a lost generation of unemployed\u00a0and disenfranchised youth. Granted in the context of a comprehensive reform effort, such relief also would help restore Greece’s status as a full working member of the euro zone, whose objectives extend\u00a0beyond economics\u00a0to important social and political achievements.<\/p>\n

But even if the case is straightforward in economic terms, it also is politically complicated.<\/p>\n

Primarily because of decisions made in the earlier bailout programs for Greece,\u00a0the bulk of the country’s debt is now owed to other European countries and\u00a0their official institutions. Accordingly, the debt relief decision only can result from\u00a0a political process that involves national parliaments, including\u00a0those of Germany, Finland and the Netherlands, which tend to be averse to any softening of the terms on past loans.<\/p>\n

Many had thought that the refugee crisis would make easier the political\u00a0approval of this economically necessary, though difficult decision. After all,\u00a0Greece has been in the forefront of the crisis, hosting — under extremely difficult conditions — hundreds of thousands of refugees who are looking to settle elsewhere on the continent.<\/p>\n

But this window has proven hard to exploit given the deep divisions within the EU that have been exposed by the crisis. Moreover, as the leader on this and many other European issues, Chancellor Angela Merkel of Germany is finding that her courageous approach to the refugee crisis now faces\u00a0growing internal opposition.<\/p>\n

WikiLeaks’s\u00a0publication of\u00a0the transcript<\/a> of internal deliberations at the IMF, an important provider of funds and technical assistance to\u00a0Greece, makes the politics even more complicated. The document details the thinking of fund technocrats as they attempt to predict how the complex EU politics of the next few months could affect a strategy\u00a0to obtain the debt forgiveness for Greece that they have\u00a0long regarded as necessary and are now suggesting could be a prerequisite for further aid.<\/p>\n

It turns out that the start of the summer could be an even more challenging\u00a0period for both the EU and the euro zone. By then, Greece could be running\u00a0out of money to run its economy and meet debt service payments. The U.K. will vote<\/a> on whether it should remain in the EU. And Europe is likely to have found\u00a0out, the difficult way, that the recent regional agreement on refugee flows\u00a0is hard to implement.<\/p>\n

Europe should be taking actions now to avoid a potential confluence of\u00a0problems this summer that, badly managed, would not just seriously test the\u00a0region’s resolve and problem-solving capabilities, but also its political\u00a0credibility. In this\u00a0context, the seemingly hard decision on Greek debt forgiveness takes on a\u00a0pragmatic necessity that reinforces its economic justification.<\/p>\n

It is the one decision that is in the hands of European governments and\u00a0parliaments that, though they are challenged by anti-establishment nationalistic\u00a0movements, are still dominated by those who believe in the historic project\u00a0of an ever-closer European union.<\/p>\n<\/section>\n

Source: Bloomberg View<\/p>\n","protected":false},"excerpt":{"rendered":"

By Mohamed A. El-Erian Creditors need to accept a haircut for the sake of Europe. (Bloomberg View) — The release this weekend by WikiLeaks of the purported transcript of discussions among International Monetary Fund officials about the best way to compel Greece’s creditors to accept debt restructuring led to much finger pointing and seeming indignation.<\/p>\n","protected":false},"author":1,"featured_media":15820,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[2],"tags":[],"class_list":["post-17395","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-2"],"jetpack_publicize_connections":[],"_links":{"self":[{"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/posts\/17395","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/comments?post=17395"}],"version-history":[{"count":1,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/posts\/17395\/revisions"}],"predecessor-version":[{"id":17396,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/posts\/17395\/revisions\/17396"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/media\/15820"}],"wp:attachment":[{"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/media?parent=17395"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/categories?post=17395"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/tags?post=17395"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}