Chris Van Es

Coco for Europe

After a year and half of delay and denial, Greece is about to restructure its debt. But this by itself will not be enough to draw a line under the eurozone’s existential crisis, for which so-called "contingent convertible bonds," or "cocos," might be the answer.

BERKELEY – After a year and half of delay and denial, Greece is about to restructure its debts.

This, by itself, will not be enough to draw a line under the eurozone’s crisis. Greece will also have to downsize its public sector, reform tax administration, and take other steps to modernize its economy. Its European partners will have to build a firewall around Spain and Italy to prevent their debt markets and economies from being destabilized. Banks incurring balance-sheet damage will have to be recapitalized. The flaws in eurozone governance will have to be fixed.

The indispensible first step, however, is a deep write-down of Greek debt – to less than half its face value. The burden on the Greek taxpayer will be lightened, which is a prerequisite for reducing wages, pensions, and other costs, and thus is essential to the strategy of “internal devaluation” needed to restore Greek competitiveness. Forcing bondholders to accept a “haircut” on what they will be paid also promises to discourage reckless lending to eurozone sovereigns in the future.

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