Debt Crisis Playbook

Believe it or not, today’s Greek financial crisis is hardly unique, as sovereign debt crises are fairly common. As a result, the policy prescriptions are fairly straightforward and well known.┬áThe bottom line? The crisis will persist unless the debt is partially forgiven. Any other method, such as extending the debt repayment schedule or lowering the interest rate, will merely prolong the nation’s economic misery. Of course, the most effective debt crisis resolutions include strict conditions for debt forgiveness; structural economic reforms such as product and labor market reforms are needed too. But until policy makers implement this tried and true formula for resolving sovereign debt crises, Greece’s economic malaise will continue.

A Shrewd Move

Prime Minister Alexis Tsipras of Greece was quite shrewd when he asked voters to approve or disapprove the bailout terms offered by its international creditors. A unique aspect of Greek political life tilted the odds in favor of the ‘no’ campaign.

The Greek word for ‘no’ is ‘oxi.’ The Greeks celebrate “Oxi” day to celebrate the 1940 decision by their prime minister to resist Mussolini’s efforts to align Greece with the Axis powers. According to Stathis Kalyvas, a Yale political scientist, “The ‘no’ is often identified with patriotism and defiance and national pride.” This tailwind likely pushed the ‘no’ vote to victory.

Tsipras gambled and the resounding success of the ‘no’ vote shows he won this round.