Debt Relief and Program Ownership

Mario Draghi responded to a interview question put forward by the Greek newspaper Kathimerini:

Q: Is debt relief important for Greece and, if so, when should it come?
Draghi: Well, I believe that two elements will be important in the coming months. The first is the one that I have just mentioned: strong ownership of the programme and determination in its implementation. The second one is debt sustainability. We have expressed concerns about current debt sustainability. In our view, there will have to be an element of debt relief. However, debt relief would not be credible if it is not accompanied by the first element. It is crucial that the government, as well as the people, identify with the objectives of the programme, which are to bring back growth, fiscal and financial stability and social fairness to the Greek economy

It is a bit like with well-meaning parents: There are parents who think handing out little rewards for good attitudes makes kids act properly according to the rules established by the parents. The program of structural reforms within the third bailout program for Greece comes with quite a lot of economic and social burden for particular economic actors, and its will be a difficult task for the Syriza-led government to execute the program in full. To demand, like Draghi did, that the Greek government and the overall population needs to demonstrate ownership of the program in order to get the chance to receive some vague debt relief seems to me a steep ask, and yet, Draghi is probably right that Greece will only get some relief if the creditors have the proof ion their hands that the Greek government took ownership of the program. The austeriterian camp hints to the economic progress in Spain, Ireland and to some degree also in Portugal to encourage Greece to move along with the cuts and restructuring. Greece differs from the other cases that it experienced the most radical cutback in public expenditures and also the most severe shrinking in economic growth and economic opportunities. The plan to achieve a annual primary budget surplus up to 3.5% in the next years adds an economic burden that runs against the requirement of a minimum level of social integration.

Greece already enjoys debt relief, and will need more of the same. And this for mainly political reasons. The Greek government only can take ownership if it is able to (i) be flexible with its doses of austerity and (ii) to showcase some early success in regards to living standards. Rushing through the whole program comes with the risk of political suicide. The creditors, on the other side, will have to stay put with their harsh demands as their local electorates are perry tired to pass along concessions to Greece. The next few days will be test when the Syriza government has to pass some critical legislation through parliament. The votes are no problems; the problem is how the reforms will be seen and quickly felt by the population, in particular the planned tax rate increases and the increase on the retirement age.