The IMF And Germany Debate: Should Europe Write Down Greece's Debt?

Includes: EWG, GREK
by: Desmond Lachman

In Europe, an open dispute has emerged between the IMF and the German government on the vexing issue of how to bring Greece's public debt down to a more sustainable level. The IMF has taken the position that Greece's official creditors, other than the IMF itself, should accept some write down of their claims on Greece. The German government for its part, is strongly resisting such calls since it does not wish to saddle the German taxpayer with the bill.

Greece's public debt to GDP ratio at around 175% is high by any standards. It also makes it extremely difficult for Greece to reach the 110% of GDP public debt target for 2022 set by the IMF-EU Greek financial support program. Following the radical 2011 restructuring of Greece's privately held debt, more than 90% of Greece's public debt is held by its official creditors. This is the rationale for the IMF's call for official debt restructuring in order to relieve Greece from a further round of severe budget austerity.

It would seem that the IMF is too insistent on a given public debt to GDP target for Greece and is not paying attention to the more substantive issue of Greece's real debt burden. This is blinding the IMF to an obvious compromise with Greece's official creditors. Instead of asking the official creditors to actually write down the face value of Greece's public debt, the IMF should be asking those creditors to substantially extend the term of that debt to say 50 years and to give Greece a 10-year grace period before Greece had to start paying interest on that debt. Such a compromise would substantially relieve Greece's public debt burden for the next ten years while at the same time relieving the European governments from having to present their taxpayers with a large bill right now for the writing down of their claims on the Greek government.