Imagine a country for which Rs 100, say, of external debt has just matured. If this amount is paid immediately, then its consumption and investment levels will have to be squeezed, forcing the country to a regime of quasi-stagnation and low living standards, which would bring huge social unrest in its wake. The alternative is to defer debt-collection, allow the country to use this Rs 100 for domestic consumption and investment, and to supplement this amount with additional resource mobilization at the expense of the tax-evading rich, to boost consumption and investment still further. In that case, the living standards of the people, and the growth rate of the debtor country, will be markedly higher than in the first scenario. And if this growth rate exceeds the rate of interest on the debt, then creditors need not even be worried about default, since the country at a future date will have less to pay relative to income than now, in clearing the legacy of this Rs 100 of current debt.
Hence, as long as the interest rate on the deferred debt is lower than the growth rate that a programme of which debt-deferment is a part would generate, creditors should not mind debt-deferment. Why then is the Angela Merkel government of Germany so vehemently opposed to a re-scheduling of Greek debt, when the people of Greece, squeezed by years of austerity, have just voted to power a political formation that promises to end it, and whose failure will cause massive political and social unrest in Greece and in Europe at large?
The answer, it may be thought, is that this condition, about the growth rate following debt-re-scheduling being higher than the interest rate on the re-scheduled debt, will not hold, since the market will be reluctant to lend to an already over-indebted Greece, or to roll over its debt, at less than a considerably high interest rate, because of the risks involved. But much of Greece's debt is now owed to the European Central Bank (and even if this were not so, the ECB could have stepped in to take over the debt), so that the market does not enter the picture. Besides, in the current world scenario, where the crisis has forced down interest rates in the advanced countries, even to nearly zero in the United States of America, this condition should not be too difficult to fulfil for the ECB.
The reluctance of Angela Merkel's Germany to re-schedule Greek debt is not a personal issue concerning Merkel. Her behaviour is dictated by the predilections of her main constituency - globalized German capital. But why should German capital act in this way? One possible reason could be fears of the Greek government's reneging on promises of payment in future. But it is always open to the European Union to exert the same pressure on Greece at some future date in the event of its dilly-dallying on payment, as it is exerting now; and, at that future date, the resistance to payment will also be lower because of the relatively lower burden of the debt. Besides, the very fact of Syriza keeping faith with the people (otherwise it would not be asking for debt deferment) should persuade German capital of the reliability of its word. So this cannot be the explanation for Merkel's intransigence.