Greek man walking riot police Michael Debets/ZumaPress

The Threat of Greek Debt Relief

The case for debt relief for Greece is not as strong as many observers seem to think. Not only is debt far from the strongest drag on the country's economic growth; a reduction in Greece's nominal debt would undermine the common framework of rules and standards that underpins the eurozone.

BERLIN – With Greece’s economic crisis still raging, prominent voices, ranging from Nobel laureate economists like Paul Krugman to officials like US Secretary of the Treasury Jack Lew, are calling for more lenient bailout terms and debt relief. Even the International Monetary Fund – which, along with other European lenders, has provided Greece with emergency financing – recently joined that call. But could such an approach really be the proverbial silver bullet for Greece’s crisis?

The short answer is no. While Greece’s public debt is undeniably high, and evidence abounds that high debt can hold back economic growth, the country faces even stronger drags on growth, including structural weaknesses and political brinkmanship, that must be addressed first.

In fact, Greece will likely depend on concessional funding from official sources in the years ahead – funding that is conditional on reforms, not debt ratios. Greece’s nominal debt stock will matter only once the country re-enters the debt markets and becomes subject to market, not concessional, borrowing terms. In the meantime, Greece must implement the structural reforms needed to restore the country’s long-term growth prospects and thus to strengthen its capacity to repay its creditors without a large nominal debt reduction.

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