Greece’s Debt Burden: The Truth Finally Emerges
As long ago as 2010, when Greece was first bailed out, many knowledgeable observers, including some members of the I.M.F.’s board of directors, worried that Greece would never be able to pay back all of its debts—its total debt burden is about a hundred and seventy five per cent of the country’s G.D.P.—and advocated imposing a haircut on its creditors. Rather than doing this, the European Union, the European Central Bank, and the I.M.F. loaned the Greek government money to pay its creditors, which were mostly European banks, at a hundred cents on the dollar. In the now-famous words of Karl Otto Pöhl, a former head of the Bundesbank, the bailout “was about protecting German banks, but especially the French banks, from debt write-offs.”
.. But they were concerned that writing off some of Greece’s debts would set a precedent for other heavily indebted countries, such as Ireland, Italy, and Portugal. Rather than going down that route, they stuck to the fiction that Greece, if it embraced austerity and structural reform, would eventually be able to pay down all of its loans—a strategy widely known as “extend and pretend.”
.. Greece isn’t going to cut, or reform, or grow it’s way to debt sustainability. Either it will default on virtually all of its loans and adopt a new currency, or it will need debt forgiveness of the sort that Germany enjoyed after the Second World War, when more than half of its loans