Saturday, August 8, 2015

Time for Europe to take Greek lessons from Asia

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" supporters celebrate referendum results on a street in central Athens on July 5 after Greeks voted overwhelmingly against a historic bailout referendum. © R
     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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