Thursday, July 21, 2011

Greek Default Envisioned

Sarkozy and Merkel held an all-nighter last night, and the upshot seems to be that a partial Greek default is no longer off the table. This implies that private banks will have to accept substantial losses on their holdings of Greek sovereign debt, and issuers of credit default swaps on the defaulting debt will be obliged to pay. Such a move will no doubt be accompanied by a Eurozone guarantee of future Greek borrowing, to ensure that Greece is not frozen out of credit markets. With such a guarantee, Greece might be able to borrow at lower rates, which would be a major step toward putting the country in a position where it might conceivably be able to pay off its debts without further austerity measures, which would strain the political system to the breaking point. So, this time--after a tenth European summit to deal with the Greek crisis--it might just work. But no numbers have yet been released, and arithmetic matters. And to date, the Euromeisters have not demonstrated much of a gift for arithmetic.

1 comment:

bernard said...

This is likely an optimistic view.

A lot of countries have lost a lot of competitiveness against Germany, with attendant consequences. Take for instance France, the ultimate target after Italy in this game, and its growing litany of monthly commercial deficit records (yet another pointer to the success of policies implemented over the past few years).

At some point the chicken will come home to roost and, in contrast with the US, where that meant letting the dollar drop, the official choice in France will likely, initially, be an internal devaluation, which is a nice sounding economist code word for something that, in actual fact, is very ugly.

And then the chicken will come home to roost again and all we'll be left with will be a greater deutschemark zone, not including France. Why oh why did the incompetents of the Balladur government not listen seriously to Schäuble at the time? Much of this mess could have been avoided had closer economic government been accepted among the inner core of the time. It is too late now, I fear, and the proposal is essentially off the table and would now need a refoundation of the EU.

Debt can almost always be overcome where there is economic growth (see for instance the US experience, 1945-1960). Economic growth does not usually happen to uncompetitive economies.