Time for Debt Reduction in Greece
With Greece's cash balances severely stressed, another round of contentious discussions with its creditors has begun. The only way to escape this vicious cycle, and enable Greece finally to leave its troubles behind, is to stop kicking the can down the road and agree to a credible debt-reduction program.
WASHINGTON, DC – Once again, Greece is at an inflection point. With its cash balances severely stressed, it seems unlikely to be able to pay the cascading debt payments that are falling due over the next few months. So yet another round of contentious and protracted discussions with its creditors is underway – one that may well produce yet another short-term solution. Yet kicking the can down the road is hardly the negotiators’ only option. Indeed, it is the wrong approach.
When facing severe payment problems, a country has five basic maneuvers at its disposal. It can, first, draw down the monetary reserves and wealth it has built up during better times and, second, borrow externally to meet payments falling due in the short term. Third, it can simultaneously or subsequently implement domestic austerity measures (such as higher taxes or spending cuts) that free up resources to make debt payments.
Fourth, a cash-strapped country can also implement strategies to spur economic growth, thereby generating incremental income that can then be used for part of the payments. And, if none of this works, it can pursue a fifth option: allow market forces to implement the bulk of the adjustment, whether through very large movements in prices (including the exchange rate) or by forcing a default.