Even with a bailout, Greece's debt must be tackled

(PARIS) - Write down, write off, restructure, reprofile...whatever term you choose, if Greece doesn't completely default on its debt, its creditors will have to address the issue of its massive debt.

Sunday's referendum is being framed by many as being about whether or not Greece stays in the eurozone, but debt is the underlying issue.

At over 300 billion euros ($330 billion), Greece's debt represents some 180 percent of GDP -- nearly two years' economic output.

As part of its bailout Greece has slashed spending, pensions and wages while hiking taxes to generate funds.

But at a severe economic and social cost: a quarter of the economy was wiped out in a five-year recession, unemployment more than doubled to 25.6 percent and pensions and benefits were roughly halved between 2010 and 2014.

The radical left Syriza party rode to power in January elections on an anti-austerity groundswell. Its desire to let up on austerity, combined with Greece's now poorer economic perspectives, means that the country's debt is no longer sustainable, if it ever was before.

Economist Charles Wyplosz said that from Greece's first bailout in 2010, the bailout programme "should have started with a reduction in debt. Now in 2015 it is even more necessary and urgent."

For him, not to have attacked Greece's debt from the start was "a fundamental error" by the creditors.

Moreover, Greece's debt load has increased, as austerity caused a slump that wiped a quarter off national output and the bailout took the form of loans, not grants.

Greece's debt has shot up from 130 percent of GDP in 2010 to 180 percent now, even though private-sector debt was written down under a restructuring worth more than 100 billion euros in 2012.

If Greeks vote 'No' on Sunday and there is no temporary assistance forthcoming, Athens will have to keep banks closed and may default on more payments.

The government would be under intense pressure to reintroduce the drachma or some temporary currency to pay wages.

But the currency would likely quickly drop in value, making Greece's euro-denominated debt impossible to pay, forcing Athens to default.

This would force creditors to write off Greece's debt, acknowledging they'll never get the money back.

- Restructuring-lite? -

A 'Yes' vote opens the way to a variety of options for dealing with Greece's debt.

One is to continue with a similar policy that creditors have insisted Greece pursue these past years: run budget surpluses to repay debt.

But the amount of the required surpluses could be reduced to ensure Greece's economy grows, as would the level of debt that Greece has to pay -- a "reprofiling."

Reprofiling debt is extending the maturity, thus lowering the amount that needs to be repaid every year, especially if interest rates are cut as well.

As official creditors now hold 80 percent of Greece's debt, they can make a big impact on its payments with such a "restructuring-lite".

In fact the EU has already cut the interest rates and extended the maturity on its Greek debt, and in 2012 it held out the prospect of doing so again.

Politically, restructuring-lite is relatively attractive in that losses on Greek loans would not need to be booked as both France and Germany go to the polls in 2017.

Tsipras's government had earlier called for such a solution, but the eurozone refused to make promises until Athens had signed up to reforms.

But European Commission chief Jean-Claude Juncker pledged this week that a restructuring-lite could be agreed later this year if Greeks vote 'Yes' in the referendum.

- Restructure or 'eternal penance' -

The restructuring proposals that Tsipras made last month fell flat, although they bordered on being heavy rather than lite.

Greece suggested a major portion of its debt be converted into perpetual bonds -- essentially it would only pay interest, but this is politically unpalatable as it is a tacit recognition the capital may never be repaid.

Another Greek suggestion was growth-linked bonds under which it would only repay in amounts tied to how much its economy expands.

A more substantial restructuring involves creditors taking a "haircut" on the amount of capital they get paid back -- in effect accepting a loss.

They write down the value of the debt in their accounts.

A more extreme version would be to forgive -- write off -- the debt completely.

Economists are sceptical that a restructuring-lite would be enough however, especially if the creditors keep to their strict austerity policies that prevent the Greek economy from growing.

"Even if Greece's debt is restructured beyond anything imaginable, the country will remain in depression if voters there commit to the (creditor's budget surplus) target in the snap referendum to be held this weekend," said Nobel award-winning economist Joseph Stiglitz

"Perhaps a depleted country -- one that has sold off all of its assets, and whose bright young people have emigrated -- might finally get debt forgiveness," he wrote bitterly on his blog.

French economist Thomas Piketty said pithily that failing to quickly restructure Greece's debt would be to condemn the country to "eternal penance".