Debt restructuring: a proposed principle – Mainly Macro


With Greece under Syriza about to enter negotiations with the Troika, there has been much discussion of what might happen, and what should happen. This post is in the ‘should’ category, writes Professor Simon Wren-Lewis in Mainly Macro.

In the past I have argued that the Troika should welcome the opportunity to put right earlier mistakes. There should be a large amount of guilt, or at least regret, on their side… to show that I’m not living in a dreamland, read this FT piece by Reza Moghadam, the former head of the European Division of the IMF.

In reality debt restructuring is a bargaining game, but I want to suggest a general principle that any agreement should hold to. That principle is that there should be no significant increase in unemployment above its natural rate (let’s call this excess unemployment) as a direct result of having to pay interest on any government debt.

This is why the Troika should feel guilty, because by not allowing Greece to default on all its debt back in 2010 it helped create a situation where over half young people in Greece are unemployed… As I have argued in the past in the context of Latvia, the efficient way to restore competitiveness is to have small but persistent excess unemployment: a ‘short sharp shock’ is much more costly. The Troika imposed much too much austerity on Greece in a futile effort to avoid full and early default.

The process transferred the ownership of the remaining Greek government debt from the private sector to the public sector – other Eurozone governments and the IMF. The transfer to other European governments was wrong in two respects. First, it was another example of governments bailing out their own banks and other financial institutions with no costs to those institutions. Second, it made any subsequent restructuring of Greek debt much more difficult politically. If there had been full and immediate default there would have still been need for additional lending to Greece to give them time to adjust their public finances and avoid a large increase in unemployment, but that is what the IMF is for. If the Troika had not been involved, the IMF may well have gone for early and complete default.

So much for the past and guilt. What about what should happen now? The priority is for Greece to reduce unemployment as quickly as possible.

Read the rest of this article on Mainly Macro.

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1 thought on “Debt restructuring: a proposed principle – Mainly Macro

  1. Chris

    …If the Troika had not been involved, the IMF may well have gone for early and complete default. …

    The UK government has copied the Troika when the UK has no debt to the EU.

    The Troika demanded the loss of employment rights such as striking, cutting wages both public and private (when the debt is public only) and cutting the pensions of people from all sources, leaving old people of a great age with little more than 100 E a MONTH pension.

    Many pensions had nothing to the state, and were private works pension funds.

    This is what Hungary did. It nationalised all pensions, private, works and state, and gave the EU the money to pay off debt. This is moral theft by the state.

    Today the Lib Dem Pensions Minister Mr Webb has succeeded in ending the
    state pension for huge numbers of people retiring on and from 6 April next year, or leaving them with official forecasts already of as little as £55 per week with no top ups.
    See why under my petition, in my WHY THIS IS IMPORTANT section, at:

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