This is why Pettis thinks Varoufakis’s plan to swap existing Greek debts for obligations indexed to GDP is a good idea that ought to be expanded to other countries, including Spain and Italy. The appeal of these GDP-indexed obligations is that they give creditors an incentive to support investments in future growth.
That’s very different from the current setup, where the Troika has every incentive to tie its funding to the willingness to implement austerity programmes. Even if those programmes boosted productivity in the long term by shifting resources away from the state, the behaviour demanded by the euro area’s official sector creditors exacerbates the cyclical weakness.
The good news, though, is that a different liability structure that encourages additional investment could instantly lead to stronger growth given the reforms that have already occurred. Moreover, a large-scale restructuring should encourage lots of new investment even if it also wipes out many existing creditors, at least if they are done soon. As Pettis puts it: