Greece’s Bogus Debt Deal
PRINCETON – The process of official forgiveness of Greek debt has begun. Referred to as “official sector involvement” (OSI), it includes several initiatives aimed at reducing Greece’s debt/GDP ratio to 124% in 2020, from roughly 200% today. Even as the deal was announced, however, newspaper reports suggested that officials recognized that the measures would be insufficient to meet the target; further negotiations on additional steps would be needed at a politically more convenient moment.
The economist Larry Summers has invoked the analogy of the Vietnam War to describe European decision-making. “At every juncture they made the minimum commitments necessary to avoid imminent disaster – offering optimistic rhetoric, but never taking the steps that even they believed could offer the prospect of decisive victory.”
This strategy needs to be inverted – and Greece offers a real opportunity to get ahead of the curve. Instead of driblets of relief, a sizeable package, composed of two elements, is the way forward. First, as Lee Buchheit, the attorney who oversaw the Greek private restructuring, has proposed, maturities on official Greek debt could be greatly extended. A simple structure would be to make all debt payable over 40 years, carrying an interest rate of 2%. This would move Greece and its official creditors beyond the continuous angst that now prevails.