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Tuesday, January 3, 2012

A default is not automatically a Euro-exit!

I fail to understand why a possible default of Greece is equated with an exit from the Eurozone. I would argue that those are 2 separate issues.

A default by Greece may very well happen; a Euro-exit cannot happen, at least not very easily (and certainly not automatically). EU-treaties provide neither for the expulsion of a country from the Eurozone nor for a country’s voluntary retreat.

Greece might be better off today if she had never given up the drachma and she might be better off if she returned to the drachma at some point in the future when stability has returned. However, a Euro-exit at this point, particularly an uncontrolled one, would bring havoc upon the country.

A default is not the end of the world if one deals with it properly and responsibly (Greece has been in default for more than half the time since her independence). The major difference with the present rescue effort is that the debt rescheduling following a default is no longer voluntary; it is mandatory and it has to be negotiated with existing creditors (risk takers remain risk carriers).

Large European banks will be in trouble? Perhaps, but that is not Greece’s problem. CDS-traders will be in trouble? Perhaps, but that is not Greece’s problem.

The Greek banking sector will collapse because of a run on banks? Not if deposits are frozen for the duration of the rescheduling negotiations.

Greece won’t be able to pay salaries and/or pensions in case of a default? I doubt that very much. First, the government will certainly have “put aside” enough Euros to finance day-to-day operations for some time and, secondly, if Greece negotiates a rescheduling in good faith, she will probably receive bridge financing from the EU in the meantime.

The major problem with a default is that it wrecks a country’s creditworthiness and makes it impossible for a country to return to capital markets for quite some time. Well, Greece has already paid that price.

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