The Need for a Plan to Reduce Greece's Debt

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In The Media

The Need for a Plan to Reduce Greece's Debt

International and regional financial institutions need to work together to negotiate a plan to reduce Greece's debt load if they wish to recoup any of their losses and prevent Greece's long-term stagnation.

By Michael Pettis

Published on Jun 6, 2011

Source: The Economist

The Need for a Plan to Reduce Greece's DebtGreece does not need a bailout. When markets perceive that a country’s debt levels are too high, a whole series of stakeholders change their behaviors in way that guarantee a bad outcome for the country. Lenders shorten the maturity of their loans, small businessmen disinvest, savers remove their capital from the country,and politicians, faced with rising political dissatisfaction, shorten their time horizons and turn increasingly to suboptimal policies. Under these conditions, it is a complete waste of time to discuss what steps a country like Greece can take to improve its economy and grow its way back into solvency. It is simply not going to happen.

Greece is insolvent and the only meaningful discussion is about who is going to pay. Workers can pay through many years of high unemployment as wages are forced down, small businessmen can pay through rising taxes and confiscation, creditors can pay, or the government can pay by privatizing assets and using the proceeds to reduce the debt burden. Unfortunately the only solution that does not result in many years of wealth destruction and economic stagnation is to get debt levels down immediately, and the only way to do this is to force Greek creditors into accepting a massive haircut on their obligations, perhaps with the chance to regain their losses when the Greek economy recovers.

The IMF, the ECB and the EC should be putting together a plan to reduce debt immediately. The longer this drags on, the worse will be Greece’s ability to pay even part of the debt and the more politically unstable Greek politics.

About the Author

Michael Pettis

Nonresident Senior Fellow, Carnegie China

Michael Pettis is a nonresident senior fellow at the Carnegie Endowment for International Peace. An expert on China’s economy, Pettis is professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets.

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Economy Eastern Europe Western Europe Europe North America

Carnegie India does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.

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