Soros is, of course, right that the Greek budget needs to be relieved of a huge amount of debt service; the figure of 50% of debt seems to have become the measure of the day.
Soros – and all the others who make similar statements – is totally wrong, however, when suggesting that this should take the form of a haircut, even a voluntary haircut.
Let me ignore what speaks against a haircut from a foreign lender’s point of view and only explain what speaks against it from a Greek point of view. This is why I feel strongly that Greece should refuse a haircut even if/when offered one.
To be able to say that “Greece has always honored all her debts and will do so in the future” is of incredible value for the future of an economy. Greece will for many, many years depend on funding from abroad, be that foreign loans or foreign investment. The stain of once not having honored all her debts would cause incredible damage for the future; for the economy as well as for the Greek people.
Every time in the future when Greece needs funding from abroad, she will feel the sentiment of “oh, you are the country which once had to be forgiven part of its debt; how do we know that this won’t happen again?”
Every time new generations of Greeks want to impress foreigners with their achievements, they will feel the sentiment of “yeah, but aren’t you the country which had to be forgiven a couple of hundred billion EUR because you wasted that money without ever having done anything to earn it?”
A recent commentary in the premier Austrian newspaper concluded the following: “Greeks, if given a haircut, have probably achieved – Chapeau! – the greatest coup of the century. Against that, the British train robbery looks like the naïve effort of minors”.
Remember, this is a stain which Greece will not be able to shed for decades, if ever. Is this really a price worth paying?
Greece’s debt must not be repaid (because it can’t be today) and it must not be forgiven (because of the above reasons). Greece’s debt must be “regularized”, that is it must be orderly structured. No public borrower ever avoided bankruptcy by repaying its debt. They avoided bankruptcy be succeeding with an orderly structuring (or rather: re-structuring) of their debts (see NYC a few decades ago; see California a few years ago; see Latin American countries; etc.).
If Greece has, say, 150 billion EUR more debt than she can presently service, the solution is NOT to forgive that amount. The solution is to reschedule the maturity of this amount out to 30 years (or even more) and to capitalize interest. That way, Greece has no expense for the service of that debt during this time but she can continue to claim that “we have always honored our debts in full and we will continue to do so!”