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Debt-for-equity swaps offer Greece a better way

Allen, P., Eichengreen, B. & Evans, G. (2014) “Debt-for-equity swaps offer Greece a better way“, VOX EU Organisation, 28 Φεβρουαρίου.


Greece needs debt reduction. This column argues that instead of offering another lengthening of maturities and reduction in interest rates, Eurozone leaders should seize the occasion and implement debt-for-equity swaps that would encourage foreign investment, speed privatisation and jumpstart the Greek economy.

Last week, Eurogroup finance ministers in their wisdom decided that there would be no debt relief or restructuring for Greece until the end of the summer. Evidently they wish to avoid exciting voters in the European Parliament elections in May. This is regrettable, since it only puts off the inevitable and forces the Troika to use smoke and mirrors to fill the government’s funding gap.

Moreover, what is currently on the table – stretching out the duration of Greek government bonds held by the ECB and ESM and lowering the interest rate yet again – will make only a small dent in the country’s debt. Stretching out maturities and reducing interest rates will not speed privatisation, nor will it encourage foreign direct investment. It will do nothing to foster growth.

The problem is that Greek policymakers must rely on deflation rather than currency devaluation to adjust prices and wages. Deflation is an anathema to long-term investor confidence, however, and the slow pace of relative price adjustment makes robust recovery difficult. In sovereign debt crises past, currency devaluation has been used to jumpstart growth and attract foreign investment. But devaluation is not an option for Greece.


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