Should Greece’s creditors tackle its mountain of debt by writing some of it off or stretching out the repayment period? This column argues that both approaches are likely to have profound negative repercussions for Greece and the rest of Europe. Instead, it suggests a “market-based solution.”
The debate surrounding the debt overhang faced by Greece is focussing on two different types of debt restructuring:
- A “haircut” (i.e. partial debt repayment) applied to the face value and/or to interest payments.
- A rescheduling of maturities (i.e. stretching out the repayment period).
But both these options are likely to have quite negative effects on financial markets for a number of reasons:
- Financial institutions would be forced to lower the value of Greek bonds in their balance sheets;
- other governments would be exposed to spillover effects; and
- the market for credit default swaps (CDS) would be hit by a “credit event”, triggering payments by CDS sellers and making them bear heavy losses.
Πηγή: Voxeu