If Greece’s debt is unsustainable, and most observers (including the IMF) seem to think it is, the country’s only source of funding will continue to be official sector bailout loans. Languishing for a decade or more as a ward of the official sector is undesirable from all perspectives. The Greeks bridle under what they see as foreign imposed austerity; the taxpayers who fund the official sector loans to Greece balk at the prospect of shoveling good money after bad. The question then is how to facilitate Greece’s ability to tap the private capital markets at tolerable interest rates. The IMF’s answer? Write off a significant portion of the official European loans to Greece or, at the very least, stretch out the grace and repayment periods of those loans until the Crack of Doom. There may be an alternative -- persuading the official sector voluntarily to subordinate its credits, on a targeted basis, to new borrowings by Greece from the private markets. If the alternatives for the official sector are to lend the money itself (with the risk that the funds may never be recovered), or to write off their existing Greek loans now as a means of rendering the country presentable to the markets, subordination may be a more politically palatable option.




Lee C. Buchheit & G. Mitu Gulati, Targeted Subordination of Official Sector Debt, 31 Banking & Finance Law Review, 371–376 (2016).