Little alternative to official sector involvement

Article Highlights

  • With IMF & EU backing, the Greek gov. wrote down the present value of its privately held government debt by 74%.

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  • Greece’s privately held debt at present amounts to only 60 billion euros, or 1/6 of the Greek government’s overall debt.

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  • A further problem with privately owned debt buybacks is that such buybacks need to be financed.

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Sir, Your editorial "The self-defeating Greek rescue policy" (November 3) did a very useful service in emphasising how unsustainable its public finances are and how desperately Athens needs debt restructuring to help extricate the country from its destructive downward economic spiral. However, it exaggerates the contribution that a further squeeze of privately held Greek sovereign debt can make in that process. Earlier this year, with International Monetary Fund and EU backing, the Greek government wrote down the present value of its privately held government debt by 74 per cent. As a result, Greece's privately held debt at present amounts to only €60bn, or about one-sixth of the Greek government's overall debt. This very much limits the contribution that even a successful private sector debt buyback programme can make to reducing Greece's public debt ratio from its currently expected peak of 189 per cent of gross domestic product in 2013 to the IMF-EU's unambitious target of about 120 per cent by 2020.

A further problem with privately owned debt buybacks is that such buybacks need to be financed. This would necessarily increase the Greek government's immediate borrowing requirement at a time when there is already strong resistance to a third bailout package.

These considerations would suggest that there is little realistic alternative to the sort of official sector involvement for which the IMF to its credit is now pushing. If we should have learnt one lesson from the past, it is that delaying such official sector involvement will only make Greece's economic problems even more intractable.

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