openpolitics.com

Germans Forget Postwar History Lesson on Debt Relief in Greece Crisis

Germany, in fact, understands moral hazard backward. The standard definition refers to lenders; covering their losses will encourage them to make bad loans again. And that is, let us not forget, exactly what Europe’s creditors have done. Their financial assistance to Greece was deployed to pay back German, French and other foreign banks and investors that held Greek debt. It did Greece little if any good.

.. But Adam S. Posen, who heads the Peterson Institute for International Economics, says he thinks it has more to do with political cowardice. Greece’s creditors were not prepared to take a hit from a Greek debt write-down and then explicitly bail out their own banking system. So they resorted to what Mr. Posen calls “extend and pretend.”