Europe’s most powerful
policy makers dismiss the idea, investors fear it, and it would almost
certainly face fierce resistance from within the Continent’s richer
countries.
Yet talk of slashing
the government debt loads of European countries, starting with Greece,
is back. For all the opposition, the idea has resurfaced with a
vengeance in recent days as the new government in Athens, facing a cash
squeeze and aiming to make life easier for its citizens, looks for
immediate ways to reduce what it owes. The pressure on Greece increased
on Wednesday when the European Central Bank cut off direct funding to
Greek banks, forcing them to rely instead on emergency loans from the
country’s own central bank. The move followed a meeting in Frankfurt
between Mario Draghi, the central bank’s president, and Yanis
Varoufakis, Greece’s new finance minister, and appeared to signal a hard
line in negotiations over debt. The E.C.B.’s announcement roiled
markets in the United States late in the trading day.
At the heart of
Greece’s problems is its eye-popping government debt load, equivalent to
175 percent of the country’s gross domestic product. Now, as Greece’s
nightmare grinds on, some economists fear that high debt levels could
hamper recoveries in other countries. That is why they are pressing for
policies that would alleviate the debts of other European nations, to
help get the region out of its rut.
“Greece is more acute,
but it is not as completely different as it is portrayed,” said Kenneth
Rogoff, an economics professor at Harvard. The economies of Spain,
Portugal and Ireland, he added, might benefit from such “haircuts” to
their obligations. Podemos, a Spanish political party that has surged in
popularity in recent months, wants to restructure the country’s
government debt to make it less of a burden.
Still, debt
forgiveness remains an explosive issue. Through the rolling crises of
the last six years, measures that would grant relief to borrowers have
stoked outrage like few others. “How many of you people want to pay for
your neighbor’s mortgage?” asked Rick Santelli, a presenter on CNBC, in a
proclamation in 2009 that went viral and is thought to have helped
swell the ranks of the Tea Party.
A similar point of view is currently held in Northern European countries as Greece seeks concessions again.
“The Greeks have the
right to elect who they want,” Hans-Peter Friedrich, deputy chief of the
Christian Democrats caucus in the German Parliament, told Bild, the
German newspaper, last month. “We have the right to no longer be
obligated to finance Greek debts.”
But with Europe
grappling with staggeringly high unemployment and stubbornly low growth,
showing some mercy on debt may yet gain ground.
Writing down debt can
in theory provide relief to a struggling country. It allows governments
to spend less money servicing their obligations, freeing up funds for
more stimulus spending. It may also bolster overall confidence in a
nation, laying the groundwork for more investment. Greece’s government
obligations remained high even after the bailout in 2012 that slashed
the country’s obligations by 100 billion euros. And even though the
economies of Ireland and Portugal have recovered somewhat, the
government debt loads in both countries still exceed 120 percent of
gross domestic product.
Given that it is
difficult to grow out of debt burdens of that magnitude, some economists
assert that it actually makes economic sense to forgive obligations.
They point to Latin American countries, which enjoyed substantial
forgiveness on their obligations after their debt crisis in the 1980s.
“That made a decisive
difference in relieving uncertainty,” Mr. Rogoff said, “and it helped
lay the foundations for healthy growth in Latin America.”
Opponents of debt
forgiveness in Europe say that making big concessions might reduce the
pressure on countries that need to overhaul their laws and work
practices to become more competitive. But the debt write-downs enjoyed
by Brazil and Mexico did not appear to undermine their desire to enact
far-reaching changes in their economies in the following years.
Still, debt forgiveness could open a Pandora’s box of negative and unpredictable forces.
Nervousness gripped
the markets in the lead-up to Greece’s 2012 bailout, and the same could
happen again, just when the European Central Bank is trying to fuel
growth with an ambitious new bond-buying program. Some analysts
therefore caution that any benefits of forgiving debt need to be
contrasted with any pain such a pardon might cause.
“I don’t think one can
reject this argument,” said Guntram B. Wolff of Bruegel, a think tank
in Brussels, “but the question is whether it is possible to change that
debt burden without doing more damage than good.”
Writing down
government debts, or stretching out when they need to repaid, causes
losses for the institutions and individuals that hold the securities.
Banks hold billions of euros in government bonds and, to make sure the
banks remain stable, money would need to be found to replenish the big
losses that the banks would suffer. Richer countries would have to agree
to provide such funds. Taxpayers there may object, adding support to
political parties that oppose much of what the European Union stands for
and wants to achieve. Greece owes much of its debt to other countries
or international institutions backed by other countries.
Investors may also
shun a country that inflicts losses on holders of its bonds, causing
borrowing costs for that nation to stay high for years afterward. Bonnie
Baha, a portfolio manager at DoubleLine, an investment firm, said that
concerns about write-downs was one reason she had shunned Europe’s
government bonds. If Greece gets a new deal, she said, other countries
might then seek the same concessions.
“Why wouldn’t Portugal show up hat in hand?” she said, “That’s certainly a fear that we have.”
If a chain reaction
were to occur, it might head to Italy. And even most proponents of debt
write-downs concede that Italy’s debt is too big to restructure without
devastating side effects.
Still, supporters of
debt forgiveness are pressing on. They say that less disruptive ways can
be found to reduce indebtedness. One approach is to link what a country
owes to the rate of growth of its economy. The aim would be to keep the
debt burden manageable when the economy is sluggish, and allow it to
rise only when growth has returned. Another innovation would be to allow
a troubled country to effectively pool its obligations with those of
more creditworthy European nations.
And some specialists
say that current circumstances in Europe could lend themselves to debt
deals. In the cases of Greece and Portugal, a big proportion of their
debt is held by other European governments, or entities backed by other
governments. As a result, a relatively small number of parties in the
so-called official sector is all that would be needed to agree to any
debt reduction.
“The official sector
can square the circle,” said Mitu Gulati, a law professor at Duke. “It
has to take the brunt of any reduction.”
