June 08, 2016
Getting real on debt relief
In an interview with Les Échos Olivier Blanchard argues that another round of debt relief is necessary for Greece. Alexis Tsipras cannot implement the reforms Europeans want him to if they are not conducive to growth. There is no sense in obliging Tsipras to reforms for which he has no popular mandate, and to insist on a 3.5% primary surplus at all costs. Growth has to rebound, even if it is feeble in the beginning. This will change the climate in the country and create new dynamics.
Martin Wolf calls it a big extend-and-pretend: the eurozone pretends Greece is not in default and Greece pretends it is reforming. From the IMF’s debt sustainability analysis it is clear that debt relief is unavoidable. Of course, both sides can continue with their extend and pretend game, kicking the can down the road. Alternatively, European creditors could get realistic on debt relief and the primary surplus target and offer concessions on both in exchange for real reforms. A third option is to acknowledge that Greece is better off outside the eurozone. With the trade balance still in deficit despite the recession, the Grexit debate is likely to reemerge once the deficit rises again. For the IMF, Wolf recommends that they get clear on their own position. If the fund does not get concessions from Germany on debt relief, it should walk away. It may not save Greece, but it could at least save itself.