Will Greece get a break on its debt?
The Greeks have been cutting public sector wages and increasing taxes in an attempt to reign in their budget deficit. Even so, their level of government debt is around 2 times the size of their economy, and their economy is stalling out in a highly regulated environment.
The austerity measures are designed to bring the government budget into balance, so Greece can pay down enough of its debt by 2020 so that it can go back to the capital markets and borrow on its own. Until then, the other European countries are committed to providing financing so Greece can continue to service its existing debt.
The focus is the time-frame. Anyone who thinks they can predict what a volatile economy is going to look like eight years from now is too clever by half. Nevertheless, the current schedule gives the Greek officials a framework within which to implement their reforms.
But therein lies the rub. That schedule is what the parties need to negotiate, or re-negotiate. In the US we have a bankruptcy system that shares out responsibility for restructuring people’s finances. The key issue is that responsibility is shared. But that’s not what seems to be on tap in Europe. They seem to want to put Greece into debtor’s prison, with a goal of reducing its budget deficit from 9% of GDP last year to 2% by 2014. This isn’t realistic.
Yes, the Greeks borrowed the money; but their creditors lent the money. Both sides have to sacrifice, and no one gets everything they want. At the end of the process, though, bankruptcy gives people a clean slate. That’s what Greece needs now.
Douglas R. Tengdin, CFA
Chief Investment Officer
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