Greece and its creditors are wrestling with the country’s debts yet again. It probably won’t be the last time. As long as they keep making the same mistake, the next agreement is no more likely to succeed than the others.
Back in 2010, Greece was given one of the biggest bailout programs in history. It got new lending in return for fiscal austerity, but its debts weren’t reduced: Creditors were spared any write-offs. Experts objected that the program put too big a burden on Greek taxpayers, that this was neither politically nor economically sustainable, and that creditors should be made to take losses. They were right then, and they still are.
There’s been some limited bailing in of creditors since then, an extension of maturities and lowered interest rates, but the basic pattern hasn’t changed. As a result, Greece’s debt keeps rising. It now stands at roughly 180 percent of gross domestic product. This is plainly unsustainable.
The new fix under discussion, according to a recent Bloomberg News report, would extend Greek loan maturities further, to 50 years from 30, and lower the interest rate paid by 0.5 percentage point. Another bailout loan, adding 15 billion euros, also looks likely. All this might keep the show on the road and allow the so-called troika representing Greece’s creditors — the European Commission, the European Central Bank and the IMF — to say that the country can meet its debt target of 124 percent of GDP by 2020. Of course, after every previous negotiation, they also said that Greece was on track.
The arithmetic keeps failing because the politics and economics refuse to play along. Greeks have come to hate the troika (and especially Germany, whose views have carried great weight), blaming its members as much as their own leaders for a prolonged depression that has left 60 percent of young Greeks unemployed. Growth is forecast to turn positive this year, for the first time since 2007, but on the current approach austerity and the suffering that goes with it will have to continue for years. The pro-bailout coalition that rules Greece is fragile. Without debt reduction, the new program is no more likely to stick than its predecessors.
The troika, to be sure, has reason to doubt the Greek government’s commitment to reform. Many of the changes the troika is demanding — such as abolishing laws that protect professions, distort prices and make it hard to fire unproductive public servants — would be good for the country. Yet the public trust needed to enact such sweeping reforms was exhausted long ago. A measure of explicit debt forgiveness, even now, might help to change that.
Investors, for the moment, aren’t worried that Greece might soon crash out of the euro area, so the pressure for a new approach isn’t intense. In a way, that’s unfortunate. Greece still needs debt forgiveness — and the European Union needs to show that it’s capable of learning from its mistakes.