02 July 2011

The Case for Greek Default

When I wrote that the whole debate on Greek debt sits on a bedrock of ideology or to put it more academically, on a paradigmatic fight about who is holding the ultimate truth, one of the two or three friends who read this blog told me that I might be exaggerating.

Well, here is the New York Times:
As negotiations proceeded in Europe this spring over Greek Bailout II, Mr. Trichet laid down a line in the sand: Nothing must be done to force banks to take losses on the bad loans they have made to Greece.
That is interesting by itself, isn't it?

That is why I keep saying that the bailout is for French and German banks (just like the TARP bailout was for US banks and oddly enough the same risk loving European banks, like Société Générale and Deutsche Bank- most of the billions injected to AIG went to these latter).

The ideology part is obvious in the proposed solution as well. The recommended measures will not yield the claimed results and with high unemployment and crippling economic contraction, next year Greece will need to be bailed out again. The Times confirms:
Francis Fitzherbert-Brockholes, a London-based partner in the law firm of White & Case, worked on that restructuring, and he questions whether austerity alone can enable Greece to grow and service its enormous debts. He thinks that Greece must get “some sort of relief” on its debts or Europe and the International Monetary Fund will just have to keep putting up more money.
In fact, the "austerity alone" clause is a fudge because such a prominent person did not want to go up against the predominant paradigm. I linked to a number of experts in my previous post but a more succinct and humorous way to put it is this:

Greece has passed their "austerity" bill, which no one actually believes will solve any problems. So a year from now will when Greece is still a mess will everyone who supported it apologize?
(In case, the haha throuws you off, Atrios is Duncan Black and he has a Ph.D in economics)

The fact remains that nothing other than austerity measures can be discussed right now. If that is not ideological fanaticism, I don't know what is. Even the Times piece fudges a bit not to confront these people head on:
The kind of austerity being asked of Greece is likely to take years to produce results, if it does at all, and some Greeks seem to have concluded that Europe will not dare let them default and that there is really no need for austerity. There is little prospect for the kind of growth that would enable Greece to meet its obligations.
What about the alternative solutions?
It may be worth it to ask for a moment what would have happened if there were no E.C.B. and no euro currency. Greece would probably have defaulted and there would have been a restructuring of its debts. The same would be true of Greek banks. The Greek currency would have plunged in value, impoverishing Greeks who could no longer afford imported goods, but some export businesses would have boomed as their costs collapsed. The economy would be growing by now.
And this is precisely what I suggested. Step out of the Eurozone, devalue the new drachma, push your exports like crazy, flood the market with cheap tourism packages (especially with North African destinations being less desirable currently) and within a couple of years ask to be admitted to the club again. And even if they say no, what do you care, you will have your own fiscal and monetary tools.

Unfortunately for Greece, with the "line in the sand" by ECB's Trichet, no European bank will have to accept losses or admit to risky behavior and Greek economy will continue to shrink, unemployment will soar and the country will require a third bailout by next year.

Lather, rinse, repeat.

I am with Atrios on that one:
You're paying the risk premium for a reason.
Just default.

Just do it.

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