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opinion | Matt Cadwallader

PolicyCast: Carmen Reinhart on what has worked in past sovereign debt crises

Economist and Harvard Kennedy School Professor Carmen Reinhart researched two centuries of data on sovereign debt crises to learn what has worked for countries facing problems similar to those in Greece.
Economist and Harvard Kennedy School Professor Carmen Reinhart researched two centuries of data on sovereign debt crises to learn what has worked for countries facing problems similar to those in Greece.Ken Dayton for the Harvard Kennedy School

The Boston Globe presents the Harvard Kennedy School PolicyCast, a weekly podcast on public policy, politics, and global issues. HKS PolicyCast is hosted by Matt Cadwallader at Harvard Kennedy School.

This summer we all followed along as a drama unfolded between Greece and its creditors in the Eurozone and at the IMF, bringing Greece to the edge of default, the banking sector to the edge of collapse and the entire “European Project” to the edge of failure. Ultimately negotiators agreed on a $97.2 billion bailout package in exchange for austerity measures, but the whole exercise had many wondering if there wasn’t a better way to deal with similar crises in the future.

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The situation in Greece is not without precedent. Most countries have experienced some kind of debt problem in their history, creating a rich trove of data on how each managed to turn things around.

On this week’s episode of the Harvard Kennedy School PolicyCast, we speak with economist and HKS Professor Carmen Reinhart, who recently combed through two centuries of data on sovereign debt crises to learn what has and hasn’t worked for countries facing similar problems in the past.

In Greece, much of the conversation focused on whether Prime Minister Alexis Tsipras, who was recently reelected for a second term, would accept the austerity measures that creditors were demanding. But while Reinhart concedes that austerity is likely in any negotiated solution, she argues that countries don’t emerge from debt “overhangs” on the power of austerity alone.

“The whole approach towards debt reduction has been somewhat limited in scope by thinking that countries with high debt burdens have exclusively relied on fiscal austerity,” Reinhart argues, “. . . the menu that countries have resorted to has been a lot richer: debt forgiveness, debt restructurings, write-offs, interest rate reductions, repayment holidays, or grace periods have all been part of the solution to debt overhangs.”

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Listen to HKS PolicyCast’s interview with Carmen Reinhart

The narrow focus on austerity has been compounded by the fact that many international financiers believe certain relief options like debt forgiveness are only appropriate in emerging markets, not advanced economies like Greece. Reinhart says this is not historically true.

“After World War I, the advanced economies had major debt overhangs,” Reinhart says, “. . . and large-scale debt forgiveness was part of the deal in bringing that episode to closure.”

Getting creditors to take a haircut — that is, some kind of debt forgiveness — is not an easy proposition. But Reinhart says that the longer they wait, the more they’ll end up having to give up in the end.

“Creditors don’t like haircuts,” Reinhart says. “They want to be repaid in full. I think the realization, unfortunately, takes a long time . . . almost a decade is not at all unheard of. . . . There’s also this trade-off between acting tough and trying to get as much out of the debtors with the fact that, at some point, reality has to sink in.”

That reality seems to have sunk in in Puerto Rico, where a high debt burden led to a default earlier this year. While not a sovereign state, Puerto Rico’s struggles with debt mirror Greece’s in several ways, including its inability to print money to inflate away the problem. But according to Reinhart, there’s good reason to believe that Puerto Rico’s creditors will be quick to come to the table.

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“Delaying the solution is not going to get anyone anywhere, and I am hopeful that the private creditors, as dispersed as they are, will come to terms with the fact that this is a case where even after the haircut . . . they’re probably still going to get pretty good returns on having bought Puerto Rican debt,” Reinhart concludes.

You can read Professor Reinhart’s paper “Sovereign Debt Relief and its Aftermath,” coauthored with Christoph Trebesch of the University of Munich, on the Harvard Kennedy School Faculty Research Connection website.