WASHINGTON, DC – Once again, Greece is at an inflection point. With its cash balances severely stressed, it seems unlikely to be able to pay the cascading debt payments that are falling due over the next few months. So yet another round of contentious and protracted discussions with its creditors is underway – one that may well produce yet another short-term solution. Yet kicking the can down the road is hardly the negotiators’ only option. Indeed, it is the wrong approach.
When facing severe payment problems, a country has five basic maneuvers at its disposal. It can, first, draw down the monetary reserves and wealth it has built up during better times and, second, borrow externally to meet payments falling due in the short term. Third, it can simultaneously or subsequently implement domestic austerity measures (such as higher taxes or spending cuts) that free up resources to make debt payments.