15 March 2012

De Crombrugghe/De Keuleneer: 'Reconstruction bonds' could give the Greek people a stake in their country's finances

Last month’s meeting in Brussels and this month’s agreement on a bond exchange have paved the way for a significant restructuring of the Greek debt (Eurogroup 2012). The write-offs of the private and public creditors have been adjusted to the possible rate of growth of the Greek economy with the objective to reach a debt-to-GDP ratio of 120 per cent by 2020. Nevertheless, this target includes an expected primary deficit in the first two coming years and a deficit due to the interest charges in the subsequent years. Given that Greece is not expected to recover access to the financial markets soon, the planned deficit will actually be financed by the official creditors.

An alternative to more foreign borrowing

A call on domestic savings may be an alternative way to finance a part of the expected Greek budget deficit. In the current exceptional circumstances, the placement of the bonds could be combined with the wage and price moderation policies which are part of the conditions for the debt reduction programme. In the long run, a domestic bond market would make economic sense. In the short run, the Greek people could be made more aware of the economic performance of the country by seeing that the value or tradability of the bonds is linked to some performance indicators.

It is hoped that wage moderation will enable Greece to recover a place on European and world markets for its goods and eventually be able to sustain a higher consumption level at world prices after years of welfare artificially built on badly used subsidies and easy borrowing in euros.

• A part of the initial wage adjustment could take the form of the compulsory payment of a small share of net wages in bonds instead of cash. Such unusual issues of government bonds may be seen as forced savings in other circumstances, but they could fit in a temporary adjustment programme.
• The bonds could be called ‘reconstruction bonds’, but beside their temporary compulsory character they would share most of the characteristics of standard government bonds, including the potential of future higher consumption.

Exceptional circumstances may call for exceptional policy instruments. ‘Reconstruction bonds’ may add some perspective to the current adjustment programme of Greece. Greek people will understand that the government doesn’t have the cash or access to markets and so may well be more accepting of the compulsory bonds than at other times, provided it is well publicised that they are temporary. Domestic solidarity is needed until new income sources have been built, or until buyers appear for the bonds. A popular and active bond market could follow and could facilitate future macroeconomic stabilisation through government borrowing and spending of excessive private savings in recessions and through the redemption of bonds with budget surpluses in boom times. An active domestic bond market and more public attention for economic performance indicators would boost the saving habits of the country. Without making it a mercantilist hoarder, this would then preserve Greecefrom excessive current-account deficits and support a recovery of its historic glorious international trade.

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