Fourth, the new instruments could be tailored to give both banks and official lenders a stake in the country’s success. Under the Brady Plan, a country’s payments were indexed to its export prices or terms of trade. The equivalent for Greece would be to index payments to its rate of GDP growth, thereby automatically adjusting Greece’s debt burden to its payment capacity.
Bonds of this sort have worked elsewhere, notably in Argentina’s recent debt restructuring. They have not been -without controversy, with investors complaining that the Argentine government manipulates the statistics. However, Europe has an obvious solution to this problem. It’s called Eurostat, the EU’s statistical agency.
So, rather than worrying that they might be approaching a Lehman Brothers moment, European policymakers would be better off designing a Greek debt deal tailored, like the Brady Plan, to avoid this fate.
The twist to this story is that the head of the Paris Club at the time of the Brady Plan was none other than Jean-Claude Trichet, the current president of the ECB. The Paris Club under Trichet provided Poland with a 50 percent reduction of its debt, on the condition that the country’s bank creditors take a similar haircut.
What better legacy for an outgoing ECB president than to dust off his notes and explain to other European policymakers how the lessons of the Brady Plan might now be applied?
Barry Eichengreen is a professor of economics and political science at the University of California, Berkeley.
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