This article appeared originally in Gulf News: link to original article
There is sometimes no other way out of a country’s debt problems except through partial or full debt relief. And this has been witnessed throughout history with the most recent being debt relief for European countries post World War 1.
Also, half of Germany’s debt, West Germany back then, was cancelled as part of London Debt Agreement signed in 1953 post Second World War. Here is an interesting clause in the agreement — Germany had to pay for the remaining debt straight from its trade surplus.
In other words, Germany exports its products to the creditor countries and pays 3 per cent of its revenues — a maximum of 5 per cent at any time — when its exports exceed imports from that country. Sounds sustainable? Well, the Germany we know today tells us all that we need to know about how sustainable such a payment arrangement has proven to be.
So what’s wrong with Greece today? And why can’t a similar arrangement be reached? Greece’s dire economic and financial situation could be attributed to a lot of factors.
One key factor is the fact that Greece’s economy is highly dependent on tourism as a source of revenues and hard foreign currencies. When the drachma was in place, Greece’s Central Bank could exert influence on how the currency would fluctuate — i.e., appreciate or depreciate.
Upon joining the Euro, these controls have been lost and the central bank had a say in fiscal policies only. One might argue here about how much control has been left after the signing of the first debt deal.
Unfortunately for Greece, the high dependency on tourism and services in contrast to its exporting sector has prevented the country from patching its fractured economy together.
There is no doubt here that many mistakes have been made along the way, and that Greece would need to change quite a few things to be offered a debt relief — if ever. Like any other country, Greece borrowed money to fund budget deficits or to fund public projects when government revenues could not support that.
The bonds issued has switched hands from private investors to European countries; the International Monetary Fund; and the European Central Bank, and were then refinanced at lower rates. That still couldn’t and wouldn’t solve Greece’s financial dilemma and Greece will remain stuck in what is referred to as a “debt trap”.
Given the current status quo, Greece’s debt is projected to be higher than $280 billion (Dh1.03 trillion) by the year 2020.
To solve this, it’s not a matter of whether or not a debt relief is necessary but a matter of how it could be done within a fully planned framework of which debt should be relieved and which should be restructured and refinanced.
Also, Greece will need to be given a grace period during which it will be encouraged to diversify its revenue sources and privatise its major public holdings like it has been doing before its snap elections. With a trade deficit of about $27 billion, there is no possible way for Greece to pay the remaining debt to its European counterparts if the trade formula was not visited and modified.
Greece imports from Germany more than it exports to it, and it imports from France while exporting nothing back. Greece owes more than 50 billion euros (Dh209 billion) and 40 billion euros to Germany and France respectively. With the government not being able to maintain an annual budget surplus, there seems to be no way out of Greece’s debt crisis except by a combination of debt relief, debt restructuring, and debt refinancing.
Moreover, Greece will need to diversify its economy away from services while establishing an industrial base that could transfer part of its imports into products that are domestically produced and hence consumed. The last thought I want to leave you with: could Germany escape its debt trap in post Second World War if the gold standard was not abolished?