Cyprus

By Lenos Trigeorgis

EU politicians have been locked in myopic and often self-defeating policies regarding bailout of troubled eurozone countries. They have insisted, in principle correctly, that troubled countries bring their finances to a sustainable path. But the austerity measures used are killing the growth prospects of these countries and damaging their ability to repay the lenders. The less able-to-pay the borrowers become, the tougher the repayment terms imposed, leading to a vicious cycle of further deterioration.

An alternative would be to tie the coupon paid on rescue loans to the growth of the country’s economy. When the economy is in recession, the debt interest burden will be lower, helping the country to boost growth; when economic growth picks up, GDP-linked payments will be higher precisely when the country can afford it.