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Definitive Solution to the Greek Crisis

Politics / Eurozone Debt Crisis Jul 01, 2015 - 12:17 PM GMT

By: Submissions

Politics

Atlantic Perspective writes: Most of the commentary on the Greek situation has focused on whether Greece should leave or stay in the Eurozone, and the dire consequences for Greece and the world´s financial markets should Greece default.

But has anyone come up with a credible solution? We believe we have one.

Before laying down the proposal, we need to check a few critical facts:



1. Can Greece repay its current debt load? No.

At this point in the game, it´s totally irrelevant to blame the Greeks, Europe or the Olympus Gods. How we came to this point is irrelevant, we should look at the situation as it is.

As a Borg would say, Greece´s attempts to pay back its monster debt are futile. Mathematically it´s just not possible. Like it or not, it is what it is.

2. Can the international creditors, and Europe in particular, afford to lose the hundreds of billions of Euros lent to Greece? No.

European countries collectively contributed for Greece´s bailout, which means that countries under financial stress like Portugal, Spain, Italy, etc, also have a few billions to lose (which they can´t afford to), in case the Greek economy collapses.

3. The IMF can´t pardon any debt, as it would set a precedent for the present and the future, that would undermine the fund´s very existence.

Point number 1 is at stark contrast to points 2 and 3. But it´s from this apparent contradiction, that a simple, logical and positive solution can be found.

No one, and I emphasize no one, has anything to gain from a Greek collapse. The Greek society would be thrown into chaos, and the world´s financial markets surely don´t need another shakedown. Also, Europe in particular, can´t afford to lose the hundreds of billions of Euros lent to Greece.

How do we solve this mess?
WITH A LOGICAL APPROACH.

1. The IMF can´t pardon debt, but Europe can.

2. For Europe, it will be much better to lose 20, 30, 40% of the money put in Greece, than risk losing all of it.

3. Greece´s debt is unrepayable at this stage, but with a big enough writedown, debt can be repaid.

4. There is still room to cut costs in Greece, be it in military spending (huge for a country of that size) and in some social benefits that are not compatible with the country´s current financial condition.

The creditor´s proposal has focused just on point number 4, ignoring the fact that even if Greece accepted that proposal, the country would be unable to pay back all the debt anyway. And a few months later, we would be back to the same situation but in a worse condition, with a shrunken Greek GDP and less of where to cut.

Both sides have to live up to the challenge: the Greek government must drop its populist, delusional rhetoric of not cutting social benefits (that will evaporate anyway if the economy collapses), and the creditors must come to terms with reality and face up to the fact that they will not get back 100% of what they lent. Well, at least not Europe.

For the reasons explained above, I believe the IMF should get 100% of its share of the pie, to save the institution in the future. Like the IMF´s recipes or not, it´s indeed the lender of last resort when countries get into trouble.

WHAT ABOUT EUROPE?
Isn´t a debt pardon precedent dangerous too?

Yes and no. It depends on how the precedent is managed. Greece has, by far, the highest debt to GDP ratio in the EU (180%). The closest contenders are Portugal and Italy at about 130% of debt to GDP ratio. That´s a sizeable difference.

Europe could adopt an abstract legislation saying, for instance, that countries with a debt to GDP ratio above 150%, would be eligible to some debt restructuring i.e., debt pardon. This same legislative package, would force countries with high debt to GDP ratios of (let´s say) more than 100%, to adopt strict cost cutting measures to avoid ever reaching the 150% level.


This new law, could even establish expenditure limits for certain items like social, military, etc spending, relative to the country´s GDP. Example: military spending capped at 1% of GDP.

This legislative package, would also determine strong financial penalties for countries which didn´t get their finances in order, once they reached their initial debt threshold (in this example, the 100% debt to GDP ratio).

Penalties could include not getting a cent from European funds. Considering that most, if not all of the countries in trouble do get European funds, this penalty would certainly be a strong “motivation” to put the financial house in order.

CONCLUSION

This proposal, being totally abstract in nature, would allow Greece to get rid of some of its debt, with the specific purpose of making the majority of it repayable.

At the same time, both the IMF and the European Union would be insulated from creating a precedent that would encourage a series of future defaults.

And most importantly: Greece would pay back its debt, at least the majority of it.

Intelligence must prevail over pride and stupidity. At least once.
That´s the Atlantic Perspective.   

Copyright © 2015 by The Atlantic Perspective.

The Atlantic Perspective is an opinion blog, aimed at explaining and providing solutions to some of the world´s most relevant issues.

www.atlanticperspective.com

This proposal, being totally abstract in nature, would allow Greece to get rid of some of its debt, with the specific purpose of making the majority of it repayable.

At the same time, both the IMF and the European Union would be insulated from creating a precedent that would encourage a series of future defaults.

And most importantly: Greece would pay back its debt, at least the majority of it.


Intelligence must prevail over pride and stupidity. At least once. That´s the Atlantic Perspective.   

Copyright © 2015 by The Atlantic Perspective.

The Atlantic Perspective is an opinion blog, aimed at explaining and providing solutions to some of the world´s most relevant issues.

www.atlanticperspective.com


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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