GDP-Linked Loans for Greece

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.