The Real Solution for Greece
Great news - the Greek parliament has passed an austerity budget. It's a key hurdle the country had to clear before receiving more international aid.
But it's not enough, says Zsolt Darvas, a research fellow at Bruegel, the Brussels-based think tank.
Even Greece's current target debt-to-GDP ratio of 167 percent is too high, he writes in a new policy analysis, adding, "it is generally thought that Greece would not be able to borrow from the market at a reasonable interest rate until the ratio falls well below 100 percent of GDP." That's a problem, Darvas says, because "the high public debt ratio and the deep economic contraction feed off each other, especially when there are widespread expectations of a Greek euro exit."
In other words, Greece is locked in a vicious and destructive cycle that is hurting not just its people but the entire euro zone, not to mention the euro.
What to do? Darvas has a four-point plan.
"A credible resolution should involve the reduction of the official lending rate to zero until 2020, an extension of the maturity of all official lending, and indexing the notional amount of all official loans to Greek GDP. Thereby, the debt ratio would fall below 100 percent of GDP by 2020, and if the economy deteriorates further, there will not be a need for new arrangements. But if growth is better than expected, official creditors will also benefit," he wrote.
In exchange for all that, Greece would have to give up a lot, Darvas says. He calls for reduced fiscal sovereignty for the troubled country, a privatization plan, and the possible use of future budget surpluses to repay debt relief.
The current mess also suggests a way to prevent future Greek-type tragedies, Darvas says: "a formal debt restructuring mechanism."
To be continued.
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