I received this slightly amusing joke via email but it made me think:

"It is a slow day in a little Greek Village. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt and everybody lives on credit.

On this particular day a rich German tourist is driving through the village, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night. The owner gives him some keys and as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher.

The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel.

The guy at the Farmers' Co-op takes the €100 note and runs to pay his drinks bill at the taverna. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit. The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note.

The hotel proprietor then places the €100 note back on the counter so the rich traveller will not suspect anything. At that moment the traveller comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money and leaves town.

No one produced anything. No one earned anything. However the whole village is now out of debt and looking to the future with optimism.

And that, Ladies and Gentlemen, is how a bailout package should works! "

The above ONLY works if all the parties absolve the others of paying any interest for their credit.

Could it work in practice?

I don't know, but the injection of a massive interest free loan to pay off all debts and then repaid in full and all at zero interest (or accepting the debt paid in full and 'forgiving' the creditors previously agreed inteest - who knows?

Interesting question Robert.

I probably would accept just the capital if it was repaid instantly. I could make up the lost interest (hopefully) by using the money elsewhere. Not sure this applies to the Greeks etc, as they're in no position to repay instantly.

I might look at it differently if the capital (alone) was to be repaid over, say, 10 years. I'd probably reason -within the next 10 years you can get yourself sorted out and pay me the interest as well.

Robert

your Greek example only works because it is a closed system and every body owes everybody else the same amount- everybody in the village owes everybody else E100. The tnet debt position is therefore zero and they can come to an accomodation easiliy.

In reality a country is not a closed system and everyone's net debt position is not the same in size.

The problem with Greece is that it cannot pay back the interest AND the capital amount on the existing debt. Even worse it it generating an ADDITIONAL debt requirement each year which it cant pay back as well. It is insolvent - but even oif it is forgiven its past debts, how does it finance next years borrowing need? The problem is not resolvable without full deafult on past debt AND massive austerity so there is no borrowing need next year.

It is hopeless without grants - any volunteers?

"If somebody owes you £10,000 and your contract states they have to repay you the £10,000 plus £1,000 interest wouldn't you rather have your £10,000 back and 'forgive' the 10% interest than receive absolutely nothing if that somebody becomes insolvent?"
This did happen in Latin America in the 1980s. The external (from debtor country) creditor banks did forgive either a proportion of capital or a large proportion of interest due to them. (They were given the choice because of different countries' accounting practices.) Generally the debtor countries had to follow an IMF programme to get economies back on track.
It was notable how the (wicked?) commercial banks did these deals forgiving either some capital or interest ... years before any such arrangement was made on the government to government debt.

I

As the thread started with a joke............

A very small and poor Italian village twins itself with a very small and poor Greek village. The Greek Mayor is invited to the Italian village, where he is picked up by the Mayor in a smart Mercedes limo, taken to a sparkling new Town Hall and then shown around the wonderful facilities of the village including a new tennis court, swimming pool etc. Amazed, the Greek Mayor asks his counterpart how he did it. "Well the European Union gave us funds to build that new dual-carriageway viaduct over there" says the Italian, waving his hand across the valley towards a single-lane bridge. "But that's not a dual-carriageway" says the Greek. "Exactly" replies the Italian, tapping the side of his nose and winking.

A year later, a reciprocal visit is arranged and the Italian is amazed to be picked up in a Maybach and taken on a tour of the most fabulous facilities.
Italian Mayor: "How on earth did you manage that?"
Greek Mayor: "Well you see that magnificent dual-carriageway bridge over there?"
Italian Mayor: "No"