GDP-Linked Loans for Greece

Greece finds itself at the crossroads. There is the imminent question if Greece should apply for a third public support programme. Government officials are confronting European partners with new calls for a de facto haircut on its outstanding debt. Another option would be to swap existing loans from the European support programs into GDP-linked loans. As a result, interest payments would be linked to economic conditions in Greek. This would, firstly, help to stabilise the debt ratio even under a weaker growth performance. It increases the repayment probability of Greek debt and lowers overall default risk, also on the remaining outstanding debt. Secondly, barriers to reform are lowered through GDP-indexation of debt, which increases the ownership of Greece in the reform process. Thirdly, an implicit deferral of interest payments helps Greece in the short run by lowering the pressure to enforce pro-cyclical fiscal policy. Finally, European creditor countries have the outlook to receive higher repayments in the long-run if the Greek economy starts growing again.