Like the title says, just some fast thoughts, mostly inspired by Norway's current public debate about whether to use their oil fund's revenue to buy Greece's debt and forgive half of it (we too could have such power if we had taken a different approach to our own resource revenues. Note that this would constitute only 6 months worth of revenue for the fund).
From my limited research thus on the interwebs, Greece seems to have enacted a huge range of reforms since the European sovereign debt crisis broke more than half a decade ago. These reforms are almost all in line with the Washington consensus for development. They amount to little less than transforming one of Europe most socialist economies into one of its most free market. The changes include privatising state owned enterprises, deregulating most markets, especially the labour market (unions are getting belted even by the current socialist government), shifting expenditure away from consumption (notably pensions and subsidies) and towards infrastructure and services (transport, health, education) instead, shifting to a broader tax base and higher average (though lower marginal) tax rates and generally getting the state out of business. These are massive reforms done very quickly, and they should be rewarded by Greece's creditors. Indeed, if Greece's creditors hope to recover their money then they really have no sensible option but to give Greece some time for these reforms to bite.
They're not doing that. In standard strategic behaviour, Greece's creditors smell a tank and are rushing to squeeze everything they can out before Greece either has a bar of it and tells them to fuck off, or tanks, at which point all remaining creditors will lose out. In doing so they are forcing the fulfillment of their own prophecy.
This is dumb, and the rhetoric stinks. Even those who say things like "never waste a good crisis" must see that the crisis has not been wasted because all the necessary structural reforms are in place. But these reforms will not translate into growth if consumption spending, consumer confidence, investment and stability are all destroyed by reckless austerity policies.
The funny thing is the Greek situation has so many parallels with the most catastrophic failure of IMF structural adjustment loans and austerity in history - the Washington Consensus programme in Africa. In that case, the core reforms were important, what was no good was the attempts at currency devaluation, the EU and US remaining closed to the very agricultural exports they were trying to spur, and the austerity programmes that devastated long term growth, investment and human capital formation in those countries to the point that we have now basically lost a generation in sub-Saharan Africa. It's all playing out again. Greece has engaged the requisite reforms but can't pay off it's debts fast enough. The Troika, instead of easing the pressure but guaranteeing repayment (with interest) in the long run, is instead hanging Greece out to dry. Last time they could be forgiven for being ignorant, but this time we have precedent.
What should be done? The most obvious thing seems to me to be a restructuring of the debt. I think an income contingent loan approach is crying out to be utilised. If Norway does buy the debt, that is what I would suggest. Buy the debt, but don't forgive any of it - otherwise the incentive to proceed with, deepen and entrench the reforms will ease and existing vested interests in Greece will try to claw back. Instead, index the interest on the debt to inflation (i.e. set the real rate to 0) and put the payment schedule onto an income contingent track. How exactly this would be done I leave to people more familiar with the situation, but the idea would be to allow Greek GDP, GDP growth and the financial sector to stabilise and gain some momentum before recommencing repayments. In the meantime, you could have some clause preventing the accruel of more debt (i,e. balanced budgets only) but no strict austerity. Some spending is necessary to grease (lol) the wheels in such a dramatic transition. After say, 5 years you could change the index to CPI, which is typically higher than inflation but pretty much still zero, and after 10 years you could move to the market interest rate for government bonds, which is also very low. Then after 15 years you could move to the interest rate on Greek bonds, which is quite high. This incremental schedule would incentivise early repayment of the loans without compromising the Greek economy's ability to get on its feet and start being productive again.
P.S. Germany are being total idiots in all this. They are emphasising the moral component of honoring your debts without recognising any part played by Greece's creditors or the fact that the Greek public is only marginally responsible for what the Greek treasury does. They are also being tossers in failing to recognise the huge and painful reforms that have been enacted. Greece has shown that is willing to take the pain if it isn't gratuitous. Germany needs to be similarly mature.
From my limited research thus on the interwebs, Greece seems to have enacted a huge range of reforms since the European sovereign debt crisis broke more than half a decade ago. These reforms are almost all in line with the Washington consensus for development. They amount to little less than transforming one of Europe most socialist economies into one of its most free market. The changes include privatising state owned enterprises, deregulating most markets, especially the labour market (unions are getting belted even by the current socialist government), shifting expenditure away from consumption (notably pensions and subsidies) and towards infrastructure and services (transport, health, education) instead, shifting to a broader tax base and higher average (though lower marginal) tax rates and generally getting the state out of business. These are massive reforms done very quickly, and they should be rewarded by Greece's creditors. Indeed, if Greece's creditors hope to recover their money then they really have no sensible option but to give Greece some time for these reforms to bite.
They're not doing that. In standard strategic behaviour, Greece's creditors smell a tank and are rushing to squeeze everything they can out before Greece either has a bar of it and tells them to fuck off, or tanks, at which point all remaining creditors will lose out. In doing so they are forcing the fulfillment of their own prophecy.
This is dumb, and the rhetoric stinks. Even those who say things like "never waste a good crisis" must see that the crisis has not been wasted because all the necessary structural reforms are in place. But these reforms will not translate into growth if consumption spending, consumer confidence, investment and stability are all destroyed by reckless austerity policies.
The funny thing is the Greek situation has so many parallels with the most catastrophic failure of IMF structural adjustment loans and austerity in history - the Washington Consensus programme in Africa. In that case, the core reforms were important, what was no good was the attempts at currency devaluation, the EU and US remaining closed to the very agricultural exports they were trying to spur, and the austerity programmes that devastated long term growth, investment and human capital formation in those countries to the point that we have now basically lost a generation in sub-Saharan Africa. It's all playing out again. Greece has engaged the requisite reforms but can't pay off it's debts fast enough. The Troika, instead of easing the pressure but guaranteeing repayment (with interest) in the long run, is instead hanging Greece out to dry. Last time they could be forgiven for being ignorant, but this time we have precedent.
What should be done? The most obvious thing seems to me to be a restructuring of the debt. I think an income contingent loan approach is crying out to be utilised. If Norway does buy the debt, that is what I would suggest. Buy the debt, but don't forgive any of it - otherwise the incentive to proceed with, deepen and entrench the reforms will ease and existing vested interests in Greece will try to claw back. Instead, index the interest on the debt to inflation (i.e. set the real rate to 0) and put the payment schedule onto an income contingent track. How exactly this would be done I leave to people more familiar with the situation, but the idea would be to allow Greek GDP, GDP growth and the financial sector to stabilise and gain some momentum before recommencing repayments. In the meantime, you could have some clause preventing the accruel of more debt (i,e. balanced budgets only) but no strict austerity. Some spending is necessary to grease (lol) the wheels in such a dramatic transition. After say, 5 years you could change the index to CPI, which is typically higher than inflation but pretty much still zero, and after 10 years you could move to the market interest rate for government bonds, which is also very low. Then after 15 years you could move to the interest rate on Greek bonds, which is quite high. This incremental schedule would incentivise early repayment of the loans without compromising the Greek economy's ability to get on its feet and start being productive again.
P.S. Germany are being total idiots in all this. They are emphasising the moral component of honoring your debts without recognising any part played by Greece's creditors or the fact that the Greek public is only marginally responsible for what the Greek treasury does. They are also being tossers in failing to recognise the huge and painful reforms that have been enacted. Greece has shown that is willing to take the pain if it isn't gratuitous. Germany needs to be similarly mature.
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