Or because of a temporary shortfall in exports, or a temporary lack of access to foreign lending, or a bunching of debt maturities?

This week, Greece defaulted on its payments to the IMF, rightly choosing pensions over debt service. The country s creditors should now negotiate a consensual debt reduction through some combination of lower (and fixed) interest rates, reduced face value of debt, and very long maturities.

In June 2005 Peru offered to prepay at par up to 2 billion in principal maturities of its non ODA debt falling due between August 2005 and December 2009.

First, as Lee Buchheit, the attorney who oversaw the Greek private restructuring, has proposed, maturities on official Greek debt could be greatly extended. A simple structure would be to make all debt payable over 40 years, carrying an interest rate of 2 .

Official bankruptcy, a regular occurrence, required prolonging maturities on state debt and reducing interest payments. But this solution raised the cost of new borrowing, so France began to consider the British model.

But that debt costs only 1 2 of GDP to service, allowing Japan to remain solvent. Likewise, Greece can now manage its public debt burden, which stands at about 175 of GDP, thanks to the ultra low interest rates and long maturities (longer than those on Japan s debt) granted by its European partners.

Although Greece s public debt amounts to about 175 of GDP, low interest rates which are fixed for a large proportion of it and long maturities mean that it may be more manageable than it seems. Greece s ratio of public debt service to GDP is similar to that of Portugal, or even Italy.

The second element of the debt relief package would be more innovative If Greece s economy performs well, the generous extension of maturities can be clawed back or the interest rate raised. A formula for this could be linked to the debt GDP ratio a scheme with advantages that transcend the Greek case.

Syriza also plans to demand a substantial reduction in Greece s foreign debt, the nominal value of which remains very high close to 170 of GDP. In fact, the real present value of the debt is much lower, given that most of it is now held by governments or other public entities and carries long maturities and low interest rates.

Seen in this light, unilateral schemes, such as the original German proposal (forcing maturities on Greek debt to be voluntarily extended for several years) are only voluntary under the ruthless interpretation. In initiatives of this sort, agreement is obtained reluctantly and pressure could provoke harsh responses.

Second, the program would cause a large drop in the eurozone s aggregate interest payments. The Maastricht compliant part of its members sovereign debt would be restructured with longer maturities (equal to the maturity of the ECB bonds) and at the ultra low interest rates that only the ECB can fetch in international capital markets.

A restructuring of Greece s official debt, despite offering short term benefits, would weaken that framework in the long run by setting a precedent for exceptions, with other eurozone countries, sooner or later, requesting the same concession. In 2013, the extension of Greece s loan maturities prompted Ireland and Portugal to demand and receive comparable extensions, despite their less obvious need.

In any case, the eurozone seems stuck with near zero rates at increasingly long maturities. What does this actually mean for its investors and debtors?

In December 2004, Congo reached an agreement with Paris Club creditors to treat the maturities falling due between 2004 and 2007 under the Naples Terms.

Debt sustainability and debt relief

Indeed, with profitability at or near record levels, cash holdings by the corporate sector in the United States have piled up quarter after quarter, reaching all time highs and earning very little at today s near zero interest rates. Moreover, because companies have significantly improved their operating efficiency and lengthened the maturities on their debt, they need a lot less precautionary savings than they did in the past.

Most economists failed to foresee the economic dynamics that actually led to the crisis, because they failed to pay enough attention to the rapid increase in US total debt. Instead, they focused exclusively on US foreign debt, ignoring household debt (mortgage and consumer debt), public debt, business debt, and financial debt.

Therefore, only current maturities and arrears were treated, and an agreement was reached that the consolidated amounts would be reimbursed over a period of 14 years, including a grace period of three years.

Debt

Debt

Options for lower debt burdens on Governments of heavily indebted developing countries include debt cancellation and debt swaps for sustainable development.

To address the debt burden problem, many African countries at first resorted to repeated debt rescheduling which focused on debt service flows, resulting in steadily increasing debt stocks and related service payments.

External debt

Debt relief

External debt

In particular, Europe s politicians are balking at steps that would implicate taxpayers directly. The Greek government has asked Europe to swap existing debts with new debts to lock in low interest rates and long maturities.

They might choose to do so, but mostly they just roll them over by issuing new bonds. The longer the bonds maturities, the less frequently governments have to come to the market for new loans.

Debt relief, debt swaps or debt cancellation could offer important means for mobilizing resources for accelerating progress towards the water and sanitation goals.

Following this approach, the country offers to exchange old bonds for new bonds with a lower face value and or lower interest payments and longer maturities. If most investors accept this offer, the restructuring occurs successfully.

(d) Debt burden

Restructuring Debt Restructuring

Europe s Debt Wish

China s Green Debt

Debt and Democracy

Does Debt Matter?

The Debt Delusion

Debt Without Drowning

Other debt renegotiations

Haiti External debt

External public debt

Noting with concern the continuing debt and debt servicing problems of heavily indebted developing countries as constituting an element that adversely affects their development efforts and economic growth, and stressing the importance of alleviating once and for all, where applicable, their onerous debt and debt service burden with the aim of attaining a sustainable level of debt and debt service,

Debt reduction, either through stock of debt reduction or debt service reduction based on a concessional rescheduling, will continue to be considered only in exceptional cases.

Emphasizing the important role that private sector creditors play in debt relief and debt sustainability,

Africa needs debt cancellation, as no growth can take place with a heavy debt burden.

Agreement by the G 8 to debt relief is a major event, but we should not be fooled by the seeming magnanimity of the gesture much of the debt would not have been repaid in any case. More debt relief encompassing more countries and more debt (including bilateral debt) is needed.