Greece looks poised to demand more debt relief, and Germany has already begun dismissing these demands. But if history is any guide, more rounds of restructuring are likely in store, and Greece’s creditors should probably brace themselves for more, and bigger, haircuts.
Next week Greek voters head to the polls for a snap election that’s effectively a referendum on the painful policies the country’s leaders have adopted to appease foreign creditors: chiefly, tax hikes, spending cuts and other austerity measures that have lodged the country in an economic depression with double-digit unemployment. The radical left-wing opposition party, Syriza, currently leads in the polls; it promises to reverse many of these measures and to fight instead for additional debt restructuring, not just for Greece but for much of the euro zone. Syriza’s leader has even called for a “European debt conference” akin to the 1953 London meeting that wiped out much of the war debt owed by (ahem) Germany.
The tables have turned since 1953, of course. Now that Germany is a major creditor to debt-burdened countries, it is unhappy about Syriza’s potential to embolden anti-austerity parties in other euro-zone countries such as Italy and Portugal. German leadership has been posturing anonymously in the press about its indifference to a Greek exit from the euro (which most economists agree would be disastrous), apparently to encourage Greek voters to abandon their hopes of major new debt relief.
New research suggests, though, that Germany will likely have to swallow additional write-downs, and not just because Greece has been in default on its external debt during roughly half the years since it gained independence. A new working paper by Harvard University’s Carmen M. Reinhart and the University of Munich’s Christoph Trebesch suggests that more rounds of restructuring, taking place over many years, are probably in the cards for both Greece and many of its peers.
The paper attempts to quantify the magnitudes, and durations, of sovereign debt restructurings from the past 100 years. It focuses on two bundles of crises: the country-to-country debt hangover in advanced economies created by World War I and its aftermath (roughly 1920 to 1939), and the sovereign debt crises in middle-income emerging markets from 1979 to 2010.
The results were striking: Whatever the hopes and dreams of both anxious creditors and troubled borrowers, sovereign debt crises are rarely cleaned up in a single restructuring or default. Instead, historically, they have tended to drag on for multiple rounds and many years.
The average default spells for the 35 emerging-market countries the researchers examined lasted 7.3 years and spanned three rounds of restructurings. (Some countries went through processes that were substantially more protracted: The 1981 Polish debt crisis, for example, resulted in seven restructurings before a final round in 1994; Brazil likewise went six rounds over the 11-year episode that ended in 1994.) For the advanced economies following World War I, default episodes were quite drawn out as well, spanning from the debt settlements in the 1920s, to a generalized default in 1934, to much later decades for select countries (including, as mentioned earlier, Germany).
Compare this record with the debt crisis in Greece. It began in spring 2010, when the country’s debt was downgraded to junk bond status and the “troika” of the European Commission, International Monetary Fund and European Central Bank saved the country from sovereign default through a bailout loan. That was followed by a second bailout in 2012. That means that the Greek debt crisis has spanned “only” about 4½ years and two restructurings. While those restructurings have been large, this debt crisis is still, historically speaking, relatively young — which suggests that more years and rounds of restructuring are, if not inevitable, at least likely, despite Germany’s insistences to the contrary.
Reinhart, who has spent much of her career examining crises and defaults that many countries would prefer to forget, says there is reason to believe the euro-zone crises might be even more protracted than the historical average precisely because we’re dealing with so many rich countries. Rich countries can afford to remain in denial and delay the inevitable for a while, taking write-downs gradually and letting the debilitating consequences of a financial crisis fester. “The longer it takes to figure out, though, the more ammunition you need in your bag,” she says, “and the more your timeline for recovery gets stretched out even further.”
That, perhaps, may be the best argument Syriza — or whoever wins next week — can offer Germany about the expedience of more debt relief, sooner rather than later.