Should Greece Default Now?

Here is an absolutely brilliant analysis by Wolfgang Münchau of the FT. Münchau's conclusion is:

"Now contemplate the alternative. Greece defaults on all its foreign debt. It establishes a new currency that would immediately devalue. To lock in the competitive gain – to turn it into a real devaluation – would require a central bank with a credible inflation target and sufficiently deregulated labour and product markets. This is not a soft option, and would require a lot more structural reforms than Athens has so far undertaken. While such a scenario would freak out foreign investors when it happened, they could be relied upon to forget it quickly, and come back quickly. After all, the probability of a default is lowest right after you have defaulted. At that point, a reformed Greece should be very attractive to foreign investors, not just financial investors. I am not advocating exit. Greek voters and foreign investors should however know that Greece is now in a position where there is a choice".

I emphasized the last sentence in bold because that, to me, is the key. Four years after the first rescue loan for Greece, the EU is still acting on the premise that 'there is no alternative'; that 'if the Euro fails, the EU will fail'. A much more convincing scenario is that, if this premise is blind-foldedly pursued, the Euro may very well fail in the longer term and with it the EU.

If the EU were to take off its blind-folds and act as a fair arbiter, it would be the EU - and not a financial journalist - who would advise Greece that the country now has an alternative. That the Greek government should comprehensively inform the Greek population about these alternatives (continue on the present course or follow Münchau's suggestions) and that the Greek government should possibly put this to a national referendum.

The word 'default' has such a bad taste to it. In reality, default is a legal event which occurs when a borrower can no longer fulfill his financial obligations. Corporations can, in such a situation, declare bankruptcy because there are bankruptcy laws for corporations. Since there are no bankruptcy laws for countries, the legal event of default is the only honest alternative. Default is not a unilateral debt repudiation (that term justifiably has a bad taste to it). Instead, default simply says 'we would like to but, sorry, we can't pay our debts'. If creditors continue to make loans to an insolvent corporation, that is, in most countries, a criminal offense. Regrettably, there are no laws which make new loans to insolvent countries a criminal offense.

When I started this blog 3 years ago and for the first couple of years, I was an adamant supporter that Greece could and should make it with the Euro. Nearly 28% unemployment and nearly 60% youth unemployment after 4 years of adjustment prove me wrong. Yes, Greece is now financially stable with both domestic and external accounts in balance (or rather: in surplus). But how long will Greece remain politically and socially stable with these kinds of unemployment ratios?

I cannot judge how quickly Greece's employment situation would improve if the country switched to a default/exit course but I am certain about the following: with the Euro, the Greek employment situation will not return to more or less satisfactory levels for a very long time.

If default were to become a serious point of (confidential!) discussions, its timing would also be of significant importance. Greece is having a run on international capital markets these days and there is a good chance that Greece could raise another few billion Euros there before the end of the year. And Greece still has about 8 BEUR to draw under the rescue program. Possibly by the end of the year, when Greece would have exploited all possible sources of funding, the time might be ripe to put a lid on it and call it quits.

Malicious tongues might suggest that this could be used as a political ploy: set the timing in such a way that it yields maximum benefit at next year's election. Well, actually, why not if it is good for the country?