Can it be right to walk away from debt?

Does Greece need to have some of its debt written off before it can reform itself? Emily Hohler reports.

Syriza the victors in Greece's general election are doing a good job of winning over mainstream economists and policymakers, many of whom are "so alarmed by the state of the Greek economy that they now agree that the only solution is to make a radical cut in Greece's national debt", says Gideon Rachman in the FT. "Unfortunately, an explicit Greek debt write-off would cause more problems than it solved."

First, it would anger many in northern Europe, strengthening nationalist parties. Secondly, anti-capitalist parties in southern Europe would press for similar writedowns, leading to a "collapse in market confidence" and possibly another financial crisis. Thirdly, the ensuing breakdown in trust between EU members would make it much harder to keep the EU together.

So the best solution is "dull compromise". The amount of interest paid by Greece on its debts has already been cut and deferred; this "extend and pretend" approach should continue until sustainable growth returns to the Greek economy.

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Let's not forget that Greece needs "drastic austerity" because its "economy is inefficient, its tax collection is a mess and its social benefits are too generous", says The Times. The economic consequences have been "severe", but "the medicine is working": Greece is expected to have a primary budget surplus of about 3% of GDP in 2015. "Abandoning this course would be disastrous." It would send out the message that economic problems "can be solved by running away".

Anyone who does the "debt arithmetic" knows Greece "cannot repay its external debts without a level of pain that is simply beyond the tolerance of democratic society", says Jeffrey Sachs in The Guardian. Some in Germany insist that a debt is a debt and that it must be repaid in full. They should recall the relief their country was granted through the Marshall Plan and the 1953 London agreement on German debts. "Did Germany deserve' the relief? That was not the right question. Germany's new democracy needed it."

Does Greece deserve debt relief today? Greek politicians behaved badly, but so did the French and German banks that made too many loans to Greece a decade ago. The "proper question" is whether Greece needs it, and the answer to that is "unequivocal". The alternative to a debt-relief agreement is "a political crash with potential ramifications vastly larger than Greece". Debt relief won't solve Greece's economic problems, but it will "open the door to a solution" that could get the economy going again.

Granting debt relief is the right course, agrees Martin Wolf in the FT. Pushing Greece towards default and a possible EU exit would "damage the union". However, if the case for debt relief is recognised, it should be "conditional on achievement of verifiable reforms" that Greece still so badly needs.

Emily Hohler

Emily has worked as a journalist for more than thirty years and was formerly Assistant Editor of MoneyWeek, which she helped launch in 2000. Prior to this, she was Deputy Features Editor of The Times and a Commissioning Editor for The Independent on Sunday and The Daily Telegraph. She has written for most of the national newspapers including The Times, the Daily and Sunday Telegraph, The Evening Standard and The Daily Mail, She interviewed celebrities weekly for The Sunday Telegraph and wrote a regular column for The Evening Standard. As Political Editor of MoneyWeek, Emily has covered subjects from Brexit to the Gaza war.

Aside from her writing, Emily trained as Nutritional Therapist following her son's diagnosis with Type 1 diabetes in 2011 and now works as a practitioner for Nature Doc, offering one-to-one consultations and running workshops in Oxfordshire.