As Cyprus finalises a controversial bailout agreement due to start tomorrow (March 19), its debt-ridden Mediterranean neighbour Greece continues to be crippled by protests. Could a radical solution that was applied to poor countries in the past now work for Greece?
In the Heavily Indebted Poor Countries (HIPC) initiative in 1996, international lenders agreed to slash the debts for some nations if they implemented key reforms aimed at stabilising public finances.
For years, the IMF and governments tried to help developing countries with short-term rescue loans but most only started to recover only when their debts were substantially reduced.
The IMF and World Bank have now approved HIPC deals with 36 countries such as Afghanistan, Bolivia, Haiti, Honduras and Nicaragua - and provided US$76 billion in debt-service relief.
The IMF claims the original aim of the HIPC was “to ensure that no poor country faces a debt burden it cannot manage”. Though Greece is not poor by international standards, the IMF's forecasts suggest the country’s debt will exceed a massive 200% of GDP by 2016.
And the European Commission estimated in October that, despite the multi-billion euro bail-out funds, government revenue will only reach 43.5% of GDP by next year.
Another example of major debt reduction in recent history was the newly-democratic Poland which had run up huge debts under its Communist rulers.
But in 1991 sympathetic creditors agreed to cut its burden if reforms were undertaken - thus allowing it breathing space to stimulate its economy and promote consumer confidence.
Another potential solution is persuading Greece’s creditors to pushing out maturities on loans as far off as 50 years.
In relation to the EU/ IMF's €10 billion bailout for Cyprus, the country is now under pressure to reduce its debt/GDP ratio to 100% by 2020.
The controversial measures contained in the deal include a one-off tax of 6.75% on bank deposits up to €100,000, and a 9.99% tax for larger deposits. In return, depositors will receive shares in Cyprus banks.