Greece has been in deep trouble. Now, the economic cancer has spread beyond simple repair.
What can the country do, if anything, to avoid a major default and possible split from the EU? Paolo Manasse — Professor of Macroeconomics and International Economic Policy at the University of Bologna — has three suggestions:
1) Reduce the Interest Rate on Current Debt
To put it bluntly, Greece will never be able to pay off its debt if it continues to appreciate at current interest levels. As it stands now the Greek debt:GDP ratio is growing, meaning that the country will not be able to generate enough internal revenue to cut into its debt. If this persists, Greece’s only option will be to default on current loans, meaning asset write offs for lenders and probable Euro-flation. The only feasible way to reduce this toxic debt:GDP is for Greece to default on a size able portion of its debt. By defaulting, Greece can reduce its interest expenses on current debt and work on creating a GDP surplus to counteract the existing deficit.
2) Turn The Primary Interest Rate into a Surplus
After it defaults on some debt, the Greek Government needs to get quick and dirty with internal expenses, and find ways to cut costs quickly and generate revenue to further counteract interest on remaining debts. If Greece can do this effectively, the financially beleaguered nation will be able to set aside portions of national income for investment, and (optimistically) generate income of their own from interest on holdings.
3) Decrease the Value of Existing Debt through some Defaulting and Extensive Restructuring
As we indicated above, allowing defaults on some (25-50%) is a must for Greece at this point. Feeling reduced financial strain with lower interest expenses on existing debt and more flexibility to redistribute existing funds, the Greek Government needs to approach lenders with reformulated plans and ask to investigate restructuring options.