The rules of debt forgiveness are rarely set in stone, whether for an individual, a company, or a country. That’s because debt leniency requires a judgment call on moral obligations, legal repercussions, and practical circumstances – for both lender and debtor.
In coming days, Greece and its European creditors may now be at such a point of decision. It will not be an easy call.
This week, Greece began yet another round of negotiations with its official creditors, this time for its third bailout loan within five years. It needs $96 billion in order to meet an Aug. 20 deadline to repay bonds held by the European Central Bank. These negotiations, however, may be different. In recent weeks, after Greece’s humiliating agreement on July 12 with its eurozone partners, Greek lawmakers have approved many difficult and competition-boosting reforms, such as pension cuts, although implementation is still an open question. And now a few creditors, such as the International Monetary Fund, admit Greek debt is so high – almost 170 percent of gross domestic product – that some debt relief may be needed.
The bailout loans have bought time for both sides to get to this moment. As in almost any case of debt forgiveness, emotions are running high. Lending is loaded with ideas of virtue and punishment, shame and guilt. At times, Greece and its main creditor, Germany, have resorted to name-calling and stereotypes, far beyond any tactical reasons in the negotiations. Each side reaches back in history for precedents. Germany points to Greece’s past fiscal imprudence and lying about its debt. Greece points to the debt forgiveness granted Germany after World War II.
Each also points to the future. Both want Greece to stay in the eurozone and maintain the promise of the European Union. They both seek a growing Greek economy, although with differing views on the government’s role.
In the end, any negotiations over debt relief will likely result in a stretching out of loan payments and a lowering of interest rates, not a write-off (or “haircut”). This will require a calm discussion, not one loaded with emotions or accusations from the past. Few societies have figured out an exact science to debt forgiveness. Bankruptcy laws are rewritten on a regular basis as new types of credit are invented and as debtors are chastened and shape up.
As Greece learns lessons from its overindebtedness, so must its creditors accept a need to keep Greece healthy and a part of Europe. They are writing rules that may be handy for a future debt crisis.