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GDP-Linked Loans for Greece

Author

Listed:
  • Marcel Fratzscher
  • Christoph Große Steffen
  • Malte Rieth

Abstract

Greece is standing at a crossroads. The need for a third rescue package has now become a critical issue. The Greek government is calling for another de facto-public debt restructuring. An alternative option presented here would be to convert existing GLF loans into GDP-linked loans. Interest payments would then be linked to the development of Greece’s GDP. First, this would reduce the likelihood of Greece defaulting on its loans and, hence, the risk to German taxpayers. Above all, however, it would achieve the aim of stabilizing Greece’s debt ratio even if growth was weak. Second, GDP-linked loans would give Greece a greater incentive to take more responsibility for its reforms and improve their chances of success. Third, indexed loans would ease pressure on the Greek government in the short to medium term by temporarily postponing interest payments, and allowing it to pursue a less procyclical fiscal policy. Fourth, lenders would benefit because the loan repayments might ultimately be higher, once the Greek economy has recovered and is growing again.

Suggested Citation

  • Marcel Fratzscher & Christoph Große Steffen & Malte Rieth, 2014. "GDP-Linked Loans for Greece," DIW Economic Bulletin, DIW Berlin, German Institute for Economic Research, vol. 4(9), pages 40-49.
  • Handle: RePEc:diw:diwdeb:2014-9-5
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    File URL: https://www.diw.de/documents/publikationen/73/diw_01.c.488644.de/diw_econ_bull_2014-09-5.pdf
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    Citations

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    Cited by:

    1. Mouabbi, Sarah & Renne, Jean-Paul & Sahuc, Jean-Guillaume, 2024. "Debt-stabilizing properties of GDP-linked securities: A macro-finance perspective," Journal of Banking & Finance, Elsevier, vol. 162(C).
    2. Sarah Mouabbi & Jean-Paul Renne & Jean-Guillaume Sahuc, 2020. "Taming Debt: Can GDP-Linked Bonds Do the Trick?," Working Papers hal-04159700, HAL.
    3. Harris Ntantanis & Lawrence Pohlman, 2020. "Market implied GDP," Journal of Asset Management, Palgrave Macmillan, vol. 21(7), pages 636-646, December.

    More about this item

    Keywords

    GDP-linked loans; fiscal policy; debt crisis; international financial institutions;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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