Thursday, July 14, 2011

Ekathimerini - Mr. Samaras' Statement on Default

“The word default is banned from our dictionary,” Samaras told his party’s political committee. “Its mere utterance can have catastrophic consequences,” he added, noting that selective default had never occurred in another EU country.

On this point one must utterly agree with Mr. Samaras’ assessment! So what can be done when the money to service debt on time is not there and when not servicing debt on time is a default?

Such a situation presents itself on a daily basis between borrowers in financial difficulty and their lenders. The first thing which is aimed for is a stand-still agreement among all parties in order to gain time for working out a solution. A stand-still agreement, when plausibly presented, cannot be interpreted as a default.

The second point which must be made clear is that one cannot get water out of a dried-out well. Greece can only “repay” debt if she is first given the money to do so. Such a financial merry-go-round serves no economic purpose (a high school student will understand this) and it binds resources and brainpower which could otherwise be invested into developing plans for an economic recovery.

Thus, one has to begin by calling a spade a spade. The money which has been spent over the last decade is spilled milk (and so is the associated debt). One has to reset the clock to zero; reschedule the maturities and interest of that debt out as far as one can; and one has to start a new game which will hopefully be played well this time.

This is nothing other than giving Greece the famous “second chance” to do all the things which she should have done in the first place, that is restructuring her economy so that it becomes a competitive and value-generating economy.

If – the second time around - Greece were to accomplish that objective (which would be a gargantuan task requiring the best minds available), then one could not rule out that the presently “spilled milk” will at least partially become good milk again in 20 years time (or perhaps more).

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