Having
teetered on the brink of exit from the euro in July, the Greek government has
agreed with its creditors to negotiate a rescue package worth 86 billion euros
($94 billion) that would keep Greece afloat for the coming three years in
return for painful economic reforms. The agreement is due to be finalized
in mid-August.
No one disputes the judgment of the International Monetary Fund
that Greece's existing debt burden, equal to about 200% of gross domestic
product, is "unsustainable," but the reforms demanded by the creditors
will delay economic recovery.
A fresh start is needed that separates the
debt hangover from the structural reforms, and Asian history can provide the
model for this.
In 1966, the Indonesian
economy had collapsed, with rampant hyperinflation, a valueless currency and an
unpayable foreign debt burden resulting largely from purchases of Russian
military hardware. Debt payments due in 1966 (including arrears from the
previous year) amounted to 130% of the value of exports. Politics was in
fragile transition from one autocratic leader -- Sukarno -- to another --
Suharto, who finally assumed the presidency in 1967. It is hard to imagine
bleaker economic prospects.
Despite this seemingly
hopeless outlook, Western creditors and Japan met in Tokyo to chart a way
forward for the old debt and for new aid. In the Cold War era, problems like
this were seen by the Western allies in geopolitical terms, as opportunities to
influence global events. This provided a breadth of vision that we have
since lost.
The debt negotiations
were mediated by Hermann Abs, Germany's most experienced banker. He knew about
unsustainable sovereign debt from personal experience: He had led the German
delegation at the 1953 London Debt Conference, which slashed Germany's debt and
laid the foundations for the country's extraordinary post-war revival. Stephen
Grenville
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