The Economist has proposed that Greece should be forgiven half of her debt. Here is a response to the editor.
Let me suggest a “4th way”. Even though all facts suggest that Greece can never repay all of her debt, I would warn against a forgiving of half that debt at this time. Firstly, Greece is a member of the EU and forgiving a member of the EU half of its debts is a different kind of precedent than doing the same thing with a “3rd world country”. Secondly, perhaps there is a 1% chance that Greece can eventually repay all of her debt (see below).
The same effect is accomplished when Greece issues new bonds for half of her debt with a 20-year maturity and with capitalization of interest at maturity. A similar mechanism could be applied to the other half except that here the bonds should only be for 10 years (say 30%) and 5 years (say 20%) and 2/3 of the interest could be capitalized during the first 5 years.
Fresh money, of course, would have to always be in a senior position.
Why do I see a 1% chance that Greece might eventually be able to repay (rather: “voluntarily refinance”) her entire debt?
Dream the following. Dream that Greeks grow up and become a “normal people” who act responsibly, correctly and honestly; that normal Greeks will manage to build up a manufacturing sector where previously unemployed now have jobs (and pay taxes), where profitable companies pay taxes and where owners pay taxes on dividends.
The Greeks must in sum be among the richest people in Europe. They own hundreds of billion EUR in liquid assets but those assets are in the wrong place (offshore). If those offshore liquid assets return only partially to Greece (because Greece and Greeks have become “normal”), one could – in that dream – imagine a boom. If for no other reason because the Greek economy has so much to catch up.
And if that were to occur, European tax payers in 10/20 years down the road would justifyable be upset that one has forgiven such a prospering country half of its debt!