Lessons from Greece
In managing public debt, there are several key lessons which countries in the Caribbean and Latin America can learn from the recent experience of Greece, says Dr Damien King, head of the Department of Economics and director of the Caribbean Policy Research Institute at the University of the West Indies (UWI).
Addressing the opening of the 11th annual meeting of the Group of Latin American and the Caribbean Debt Management Specialists here this morning, King noted that there were two sides to debt management and one was technical.
“Unfortunately, there is what we can call a political debt management which very often reflects the fact that political decisions tend to override the work of the technicians,” King mentioned as he spoke on the topic World Economic Perspective and its Impact on Public Debt Management: Lessons of Greece.
The UWI economist listed seven lessons which he said the region could learn from the experience of Greece in its debt challenges over the last five years. These lessons included being wary of outsiders offering cheap loans or easy credit; coming to terms with fiscal reality, and country ownership matters.
King said the Greek experience also showed there had to be debt relief, debt reduction required a mix; electorates should not manage debt, and more centralization was needed. In relation to the need for more centralization, King said perhaps the real problem was that countries had too much sovereignty.
“We say it is too much sovereignty because in the context of our monetary union, there has to be constraints on the fiscal actions of the individual countries, and in Europe there are insufficient restrictions on fiscal imprudence . . . so one of the lessons is that more centralization is needed, not less,” said King.
Explaining the lesson that country ownership mattered, King said it was important for governments to trust the international institutions imposing reform programmes on them. “If the implementer is unconvinced of the mission, then you can’t trust him to implement it,” he said.
“And the problem with that when you cannot be trusted to implement, then the burdens upon the reform programme and the monitoring of the reform programme become even greater. So it has to be the government’s programme. Externally imposed reforms are always problematic.”
In explaining that debt reduction requires a mix, King said there was need for fiscal austerity, economic reform, as well as debt relief.
“Once we are dealing with debts up in the 150 per cent [of gross domestic product] GDP and above level, each of them would have too much to do on its own. If we stick with fiscal consolidation, the amount of austerity that is required would be so great that it [causes the economy to contract],” he said.
“If you use only the haircut [debt relief], then it has to be too large in the absence of fiscal consolidation and economic reform . . . And if we stick only to economic reform, then we have a situation with such a high amount of debt, the indebtedness becomes a drag on the economic growth,”