Breaking the Greek Debt Impasse: A Solution for Greece

Dave here. With profound optimism, some observers are still offering solutions to the Greek Depression. Of course, solutions are abundant, while the proper politics are in short supply. This at least makes a nod to the politics. Curious to hear the views on this of those in the esteemed commentariat who have been following this closely.

By Peter Allen, an independent economist; Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley; and Gary Evans, independent trader and economist. Cross-posted from VoxEU.

Greek debt restructuring and structural reforms

Greece needs debt restructuring. On this, a growing chorus of voices is agreed (Manasse 2015, Taylor 2015). Even the IMF (2015) now acknowledges that Greece’s debt is unsustainable. Restructuring is required, it now insists, for the workability of the third programme between the country and ‘the institutions’ that is currently being finalised.

Yet, the German government refuses to agree to debt reduction absent evidence of prior structural reform. Debt reduction should be a reward, it insists, for prior action on the structural front. If it is offered now, the Greeks will be let off the hook, and the incentive to proceed with hard structural measures will be blunted.

Greek politicians – and many of their voters – insist to the contrary that they deserve a credible promise of debt reduction and restructuring now. Absent such a promise, they are reluctant to commit to painful structural reforms. In the presence of a crushing debt burden, they argue that they have already suffered enough.

Others like the IMF, putting considerations of fairness aside, imply that the third adjustment programme is doomed to fail absent an up-front commitment to restructuring. The Fund appears to be prepared to condition its financial participation in that programme on a German concession on the issue.

An agreement to a structural reform index – a way to square the circle

There is an obvious way of squaring this circle. Greece and its creditors should agree to include a ‘Structural Reform Index’ in Greek loan contracts and use it to link future terms of debt service to progress on structural reform.

With this agreement, interest paid to the creditors would decline or repayment terms would be extended with the number of structural measures taken by Greece. If Greece were to implement more reforms, future loan terms would then be made even less burdensome.

Greece would welcome the arrangement, since it would receive a guarantee of debt reduction contingent on structural reform. The German government and other creditors should welcome it as well, since debt reduction would only be conferred if Greece followed through with reform. Germany would also appreciate the fact that Greece’s incentive to push ahead with structural reforms would be heightened insofar as successful reform conferred an additional reward.

Under the proposal, Greece would incorporate these terms into its three loan agreements with the EU or convert the loan agreements, in agreement with individual creditor governments, into Structural Reform Index bonds containing these terms. The terms in question would establish a contractual mechanism that would grant pre-arranged instalments of debt relief upon completion of the structural reforms agreed upon in the forthcoming Third Economic Adjustment Programme.

The form of debt relief that Greece would receive would be improved debt-servicing terms, namely lower annual interest rates and longer grace periods and final maturities. Principal reduction has been avoided in order to accommodate what we understand to be the positions of certain of Greece’s creditors. However, this mechanism is sufficiently flexible to also accommodate principal reduction should these constraints change.

The effect of this programme would be to remove the need to negotiate debt relief at a future date, thereby avoiding new uncertainties, and to enable Greece to pronounce a solution to its debt sustainability problem. It would be received by capital markets as pre-programmed debt relief and clarify expectations of Greece’s future debt payments, which will boost confidence and reverse capital flows as the country implements its structural adjustment programme. It would give Greece an additional pecuniary incentive to pursue structural reform measures. And it would assure Germany that there will be no debt relief without structural reform.

An obvious question is who would monitor the country’s progress in implementing structural reform and determine its financial consequences. One option would be to delegate this function to the IMF. Another would be to appoint a panel of experts (one nominated by the Greek government, one by the creditors, and a third by mutual agreement). If the International Swaps and Derivatives Association can rely on determination committees to decide when a credit event affecting a credit default swap (CDS) has occurred, there’s no reason why a Greek Structural Reform Index committee couldn’t do likewise.

Including additional features to the proposal

While the central feature of the proposal is the linkage of debt relief to progress in structural reforms, the resulting instruments could be further enhanced by the inclusion of additional features, including:

• GDP-indexed value recovery.

GDP indexed warrants attached to the Structural Reform Index loans would, after a lengthy period of grace, make concessional SRI loan terms vary with the performance of Greece’s GDP. In the event that Greece’s GDP recovers to 10% above the peak Q4 2008 level, and annual real GDP growth is greater than 3%, these warrants would increase both the coupon interest rate and principal instalments. Greece’s creditors insist that structural reform will jumpstart growth. These warrants are a way for them to put their money where their mouth is.

• Pullback clause.

Creditors would have the right to revoke prior concessions and reset loans to ex ante terms in the event of substantial slippage on structural reforms. This clause would make the resulting instruments more attractive to the lenders.

• Bond conversion option and debt swaps.

At completion of the Third Programme, individual creditors could elect to convert their Structural Reform Index loans into bonds. This would allow individual creditors to take different approaches with their bailout loans, including selling them to private investors. Greece could then accept these as payment for various programmes such as debt-for-equity swaps (privatisation), debt-for-environment, debt-for-education, debt-for-poverty swaps, etc. These would result in an early exit for the creditor, reduction of nominal debt stock for Greece, and an incentive for much-needed private foreign investment in the Greek economy.

Feasibility of the proposal

So is all this feasible? In Eichengreen et al. (2015b) we provide a detailed term sheet for converting the Greek government’s eligible debt to the EU into Structural Reform Indexed loans. Using the second agreement between Greece and the Troika for illustrative purposes, we show exactly how structural reforms could be scored for purposes of these instruments. Finally, we provide a financial analysis of the proposal, showing how much debt reduction Greece will receive in present value terms. Greece is in urgent need of a confidence shock that would reset expectations, reverse capital outflows, and revive investment. A comprehensive resolution to the country’s debt problem could impart just such a shock. But a comprehensive resolution requires Greece and its creditors to think outside the box. To them we say, the ball is in your court.

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About David Dayen

David is a contributing writer to He has been writing about politics since 2004. He spent three years writing for the FireDogLake News Desk; he’s also written for The New Republic, The American Prospect, The Guardian (UK), The Huffington Post, The Washington Monthly, Alternet, Democracy Journal and Pacific Standard, as well as multiple well-trafficked progressive blogs and websites. His has been a guest on MSNBC, CNN, Aljazeera, Russia Today, NPR, Pacifica Radio and Air America Radio. He has contributed to two anthology books, one about the Wisconsin labor uprising and another on the fight against the Stop Online Piracy Act in Congress. Prior to writing about politics he worked for two decades as a television producer and editor. You can follow him on Twitter at @ddayen.


  1. charles 2

    Fantastic !

    Step 1 : The index becomes traded and published on Markit
    Step 2 : A similar index is created for each club med country
    Step 3 : CDO’s of index based debt are issues and sliced into AAA, IG Junk and Equity Tranche.
    Step 4 : Senior Eurocrats, their banking advisers and of course the “panel of experts” buy the Equity Tranche at a deep discount. If the reforms indices hold for 3 years, they have a guaranteed IRR of 25%.
    Step 4 : Junk is recycled to CDO Squared and IG to Club Med Pension funds
    Step 5 : ECB buys the AAA tranche as part of its QE

    And the silver bullet : election dates becomes automatically indexed on the rolling geometric average for the last 3 months of the index as quoted by MarkIt and published by ISDA, and, upon reaching certain thresholds, the running of the governments in the mean time is performed by the Trustee of the AAA tranche, under the tutelage of the majority of the bondholders.

    What could go wrong ?

  2. hemeantwell

    Agreed. And isn’t this just an ugly riff on a proposal by Varoufakis made early on? Zero-coupon notes coupled with “structural reforms” that were, in his version, heavily weighted to tax evasion and accumulated wealth? This proposal seems seems to be free of any concerns about fairness or humane outcomes.

  3. rodger malcolm mitchell

    Even if all of Greece’s current debt were “restructured” to zero, Greece would fall back into unsustainable debt. The reason: Greece is a monetarily non-sovereign nation with a trade deficit.

    Monetarily non-sovereign entities (including the euro governments, all businesses and all people) do not have the ability to create money. So they require more money flowing in than flowing out to survive long-term.

    Because Greece runs a trade deficit it resembles a man who spends more than he makes. Long-term, he will go bankrupt. By contrast, a Monetarily Sovereign nation (the U.S., Canada, Australia et al) can run trade deficits forever.

    Those who ignore Monetary Sovereignty ( suffer the consequences.

    1. Oregoncharles

      I assume the question of good faith had occurred to all of us. One advantage of this proposal is that it takes the creditors at their word and thereby tests for good faith – and for hidden motives.

  4. john c. halasz

    The problem is that those “structural reforms” are largely the wrong reforms, aimed at slashing wages and privatizing public assets and the like, which just diminish domestic demand and keep the country from recovery. Further, even by the lights of stand neo-liberal economic doctrine, they would take a long time to have real effect in enhancing productivity and growth prospects, being aimed at the “long-run”, not at addressing the current depression and the immense damage that has occurred and will occur due to “hysteresis”. Besides which many of the demanded reforms have already been carried out in large measure, so what further gains might factitiously be expected from further “reforms” face diminishing returns.

    No, this proposal likely wouldn’t work, just putting more lipstick on the pig.

  5. David

    You use the terms “debt restructuring” and “debt reduction” in a way that, to me, implies equivalence. Are they the same or am I just being pedantic?

  6. David

    It sounds like a good idea, but I think you’re assuming that the kleptocrats in Athens are interested in reform.

  7. Taq

    It seems like a good idea, but I think you’re assuming every side is saying exactly what it is thinking.

    The Kleptocrats in Athens want to extend and pretend until the crisis is over so that they don’t have to give back what they stole the last couple of decades.

    Syriza wants a solution that brings back growth as quickly as possible so that they can stop implementing right wing reforms from Brussels/Berlin.

    Germany and a lot of other countries don’t care about what’s happening in Greece, they’re scared that Spain and Italy will ask the same thing. Who wants to reduce Spanish or Italian debt?

    Spain and the other southern euro countries want an end where Greece loses face, because if not, their governments are on a Pasok path into oblivion.

    France, I’m not too sure. Maybe they just want enough countries in bad shape in the euro, so that they can stay in the better half.

    This is surely very caricatural, but I think it isn’t too far from the truth. No-one in power seems to WANT a solution to the problem. As long as that’s so, I don’t think one will be implemented. And it’s a pity, cause there are a few good ones out there.

  8. susan the other

    when servicing debt requires unachievable growth there is a little hitch in the calculation; it can only be diluted by time, not resolved… but better slowly than all at once

    1. susan the other

      Schaeuble said today that more debt is not the answer. He is right by all the things he knows. But he is wrong by his archaic expectations of being “paid back”… that’s not gonna happen. Some underlying thing changed, reached its point of no return – (financial time moves faster than political time) so that it can never be paid back, yet the loans kept flowing. And he doesn’t acknowledge it.

      1. different clue

        Merely because he doesn’t acknowledge it in public doesn’t mean he fails to understand it. He probably understands it very well. He is probably counting on that process being part of the method used to implement Plan Yeltsin for the Greek Assets and People.

        Greece’s only real answer is to craft and implement Plan IanWelsh for Europe.
        Send in as many refugees as possible. Open the Greek Islands wide open to all the crimelord mafias of the world to do bussiness into Europe. Give Russia total overflight privileges over Greece to keep the Syrian Arab Republic supported and supplied. And keep doing more and more things designed to force Europe into a choice of : either forgive and write off the entirety of all of Greece’s debt, or . . .
        Greece will do everything it can do step by step to destroy the Euro and burn Europe all the way down to the ground if it can. If the Greeks are ready to hold up their end of a War of Extermination right back at the Europeans, there is a lot the Greeks can do.

        1. washunate

          I think that’s an interesting assemblage of various matters of international relations. Everything we think we know publicly points to the Americans (not the Europeans) being the primary force behind destabilization in the region.

          So if Greece is on Team America overthrowing governments, that’s not really consistent with helping the Russians to stabilize one of those governments…

          1. different clue

            If we mean “the middle east” by “the region”, I think a lot of what we know indicates that the Saudis and the Lesser Petro-Gulfies and the Erdogists of Turkey want the Syrian Arab Republic destroyed all on their own, and are doing their best to overthrow it and build their Beloved Islamo-Jihadistan on the wreckage. Obama’s main motivation is his spiteful wounded-narcissism-based rage and hate at Putin for showing Obama up in public over and over and over again.

            And it is not Team America which wants to destroy Greece. It is the Fascist Racist leadership-elites of Euro Zonestan which want to do that. Perhaps Greece thinks that by showing it is with Team America against Russian overflights, that Team America will protect Greece from the Nasty Europeans? Well, Team America won’t. Team America probably can’t. Euro Zonestan smells blood and privatizable assets and will stop at nothing to Yeltsinize them. If the Greeks were to realize that, they would grant Russia total overflight freedom as a gesture of defiance against the Racist Fascist European Enemy.

  9. Oregoncharles

    A+ for cleverness. The idea may just be too logical; it doesn’t address the hidden motives, but getting it on the table – the hard part – might flush them out.

    There’s a reward for the creditors if the structural reforms actually help; shouldn’t there be a penalty if they don’t? Granted, the lenders have the upper hand.

    The biggest caveat is the nature of the structural reforms. Greatly improving tax collections would be a good thing; privatizing public services or selling off assets, not so much. The chief advantage of actually going through with a lot of them (which would surprise me – there is neither good will, on either side, nor administrative capacity) would be to establish whether they actually help. Do the neoliberals really want a practical test of their ideology? Or do they just want to punish the Greeks for not being German?

  10. washunate

    It would be received by capital markets as pre-programmed debt relief and clarify expectations of Greece’s future debt payments, which will boost confidence and reverse capital flows as the country implements its structural adjustment programme. It would give Greece an additional pecuniary incentive to pursue structural reform measures. And it would assure Germany that there will be no debt relief without structural reform.

    David, I’ve been thinking about what the authors proposed here, and a question/concern has been nagging me about this line of thinking. How does one get from clarifying government expectations to reversing capital outflows? That seems to depend upon the particulars of what happens. This isn’t some irrational, panic-induced bank run that can be stemmed by the confidence fairy. It’s a five year long endeavor now of depositors removing their money from insolvent banks.

  11. Dan Reich

    The reforms sought by the banksters will bring hardship and death to the people of not just Greece, but all of the world’s poorest people.I’ve come to believe that the finance industry is a leach, sucking the blood from us all. They take no responsibility for bad investment decisions. They make mistakes that no one can afford. In a sane world, that debt would simply be written off.

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