A recent Bloomberg article provided, in my opinion, the most succinct analysis of the pros and cons of debt forgiveness.
Bloomberg reported on the economic plight of Greece. Greece basically "strategically defaulted" on its debt due to it's inability to pay its creditors. Greece fell victim to Europe's debt crisis when Wall Street imploded in 2008. All of the risky investments finally caught up to Greece like so many other countries, companies, and individuals. A group of European countries tried to help Greece (to keep it from destroying the European Union) by providing several bailouts to Greece totalling, at least, $264 billion. At the same time, the International Monetary Fund (as a condition to lending money) has been pushing for the forgiveness of Greece's debts by its creditors.
The article briefly outlined the benefits of debt forgiveness as follows:
"Beyond a certain point, high indebtedness does more than crush directly the recovery efforts of the debtor. It also inhibits new capital from coming in as fresh providers rightly worry about being contaminated by what is already an excessive existing liability. Without the much-needed oxygen provided by capital inflows, the debtor suffers even more, rendering growth almost impossible and making the debt trap even deeper."
The article briefly outlined the drawbacks of debt forgiveness as follows:
"Debt forgiveness is never granted easily, and with good reason. Even when it is a financially viable solution, the concept raises fundamental issues of fairness and incentive-compatibility. Why should a deadbeat debtor be granted relief when others have labored to pay off their debt? What about the creditors who worked hard to earn the money that they lent; why should they be punished? And doesn't the granting of debt forgiveness encourage other debtors to be less diligent, potentially undermining the overall flow of credit that supports economic growth and broader opportunities for well-being and prosperity?"
Greece has taken more debt to pay off its debt i.e. Greece is "robbing Peter to pay Paul." For Greece, like many other indebted countries, debt forgiveness will be the only way out.
If debt forgiveness is good for Greece than debt forgiveness is good for all people. Since it will be impossible to pay off all of the debts accumulated by countries, companies, and individuals debt forgiveness will happen in some form.
Thus, if debt forgiveness will be the solution then a well executed strategic default will continue to be an important strategy for individuals, companies, and countries.
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