NEW YORK – The ongoing Greek debt saga is tragic for many reasons, not least among them the fact that the country’s relationship with its creditors is reminiscent of that between the developing world and the aid industry. Indeed, the succession of bailouts for Greece embodies many of the same pathologies that for decades have pervaded the development agenda – including long-term political consequences that both the financial markets and the Greek people have thus far failed to grasp.
As in the case of other aid programs, the equivalent of hundreds of billions of dollars has been transferred from richer economies to a much poorer one, with negative, if unintended, consequences. The rescue program designed to keep Greece from crashing out of the eurozone has raised the country’s debt-to-GDP ratio from 130% at the start of the crisis in 2009 to more than 170% today, with the International Monetary Fund predicting that the debt burden could reach 200% of GDP in the next two years. This out-of-control debt spiral threatens to flatten the country’s growth trajectory and worsen employment prospects.
Like other aid recipients, Greece has become locked in a codependent relationship with its creditors, which are providing assistance in the form of de facto debt relief through subsidized loans and deferred interest payments. No reasonable person expects Greece ever to be able to pay off its debts, but the country has become trapped in a seemingly endless cycle of payments and bailouts – making it dependent on its donors for its very survival.
The country’s creditors, for their part, have an incentive to protect the euro and limit the geopolitical risk of a Greek exit from the eurozone. As a result, even when Greece fails to comply with its creditors’ demands – for, say, tax hikes or pension reforms – it continues to receive assistance with few penalties. Perversely, the worse the country performs economically, the more aid it receives.