The focal point of the austerity debate in Greece revolves around the question of nominal debt write offs or what is popularly referred to as the debt. A direct consequence of participating in a monetary union is that the government cannot pursue ‘active ‘fiscal policy along with accommodative monetary policy i.e. print money and repay debt. An important consequence of this is debt devaluation i.e. we pay back less than what was borrowed in real terms. Unfortunately since Greece is tied to the Euro debt monetization is not an option.
Thus frames the conundrum facing the radical left who after its landslide victory is bargaining a nominal debt write down and Germany is holding strong against it.
A bit of historical recap might be insightful here. Nominal debt write down is a particularly sensitive topic for the Germans since post World War II they were in a similar situations as the Greeks are facing now. Germany owed close to 30 Million Deutsch Marks to 70 countries. Under the London Debt Agreement signed on February 27, 1953 Germany witnessed 50% write down of its nominal debt and the remaining restructured to a longer term repayment framework.
Under the revised debt structure a large part of the repayment depended on servicing through trade surplus. In other words the turning point of the German economy towards a country experiencing export fuelled growth was largely facilitated by the debt restructuring program.
While Alexis Tsipras has been citing the German example towards debt write downs, it is imperative to note that the causes were completely different. While a war ravaged German economy was rebuilding an entire nation, a large part of Greece anomalies is due to government excesses in inefficient management/allocation of resources.
At present the Greek government has 320 billion euros worth of aid to the ECB and the IMF. ECB officials are inclined to ease the terms of repayment of the bailout program which is due for renewal at the end of February.
While the ECB promises to preserve the spirit of the Euro and retaining Greece as a member country, further haircuts on debt seem unlikely. All eyes are now on the financial package to be proposed by Alexis Tsipras.
On one hand he has to live up to the anti-austere spirit that won him the majority at the other end looms the danger of default as Greece is scheduled to make a payment of 10 billion euros over summer with cash backup that is sustainable only for a few months. Faced with sky high rates (10% and 17%) the choices appear limited.
So what are your thoughts?
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