Rescue package for Greece - How about a Greek one?

By now of course you know of the rescue package that has been created for Greece. Though large, there is still a lot of work that needs to be done and Greece cannot breathe easy. Many changes - structural ones still need to be done.

While Europe dithered and bickered, economists, policy-makers and dinner ladies all came up with their own solutions. Mr Economides from the Stern Business School New York, highlighted 7 key aspects that a rescue package should cover. He writes...

"A national strategy for Greek sovereign debt needs to achieve the following:

1. Convert present debt to long term debt to avoid a default in the next two years. No matter how successful the reforms are, Greece will default if it does not convert its short term debt to long term debt.

2. Reduce the size of the total Greek debt. To pay the total amount of debt, Greece needs very fast sustained growth year after year over a fifteen years – not impossible but very unlikely. Otherwise, Greece requires a significant reduction of the total debt burden and has to focus on the way that this can be done best in the national interest.

3. Keep Greek banks afloat, liquid, and with sufficient trust to them. Greek banks have been subject to a prolonged bank run for over a year, as depositors have withdrawn large amounts. Every day that the debt problem is not solved, there is a chance that the bank run will become acute with truly disastrous consequences for the banks and the Greek economy. Such events may be triggered by the idiotic remarks of prominent Greek politicians that Greece is leaving the Euro, a Spiegel story, or practically any rumor in the Greek or foreign media or the Internet. The danger to Greek banks alone is sufficient to require the immediate solution of the Greek debt problem.

4. Improve the quality of Greek debt to be able to achieve lower interest rates. The present market rates for Greek sovereign debt, from 11% to 26%, are prohibitive for Greece. Greece cannot afford to borrow at interest rates above 4-5%. It will achieve these interest rates only if it increases the quality of the bonds. That can be done by either by buying high quality liquid collateral such as Eurobonds or by a guarantee from the European Stability Mechanism (ESM).

5. Be based on the true reality of the situation and should not expect Greece or its partners to do the impossible. In their attempt to please voters, politicians in Greece and the EU with very short horizons have often agreed on terms that are unfeasible. For example, the first aid agreement said that Greece would come back to the financial markets in 2012, even though no one believed this to be feasible.

6. Should be a comprehensive solution and not an attempt to kick the can further down the road.

7. It would be useful but not absolutely necessary for any refinancing not to create a 'credit event' that would lead the rating agencies to declare Greece in default."

His full article can be read here