by Paolo Mauro
Peterson Institute for International Economics
February 24th, 2015
The melodrama in Greece has produced demands that Athens and its European partners take decisive action to fix a complicated situation once and for all. In fact, kicking the can down the road—as the players did recently to avert a financial crisis—is an underrated and long-standing feature of debtor-creditor relations. The rattling metallic noise produced by the joyous act of kicking that can is fondly remembered from childhood days. Today it marks the sound of Greece and its official sector partners bound together in a long-run relationship by virtue of their large exposures as debtors and creditors.
No doubt a more orderly and speedy negotiation with less last-minute drama and posturing in public would be welcome. But unconditional fiscal transfers are not envisaged. Complete and unconditional debt relief would run the risk of profligate spending in Greece and elsewhere. At the opposite end of the spectrum, expecting a new government to abide willingly by a detailed list of tough austerity measures in the absence of outside monitoring also does not seem plausible. Anything in-between is messy and requires repeated interaction.
Creditors will continue seeking to influence the economic policies of a debtor country in an effort to get repaid. Greece will be asked for some degree of “austerity” for many years to come. Negotiations on debt relief and the size of the primary surplus are two sides of the same coin. Creditors will ease the pressure only if it becomes apparent that excessive austerity will undermine economic growth to the point that it reduces the debtor’s ability to repay.