Latin lessonsManaging a sovereign default is always horrendously difficult, of course, but as this leader points out, there are useful precedents and restructuring models (mostly from Latin America) that can be used for guidance. It won't be the end of the world for Greece, and it won't necessarily mean disaster for the European banking system, if it's handled properly and doesn't spread to other countries.
AT FIRST sight, Greece’s debt crisis has taken another turn for the worse. Yields on its government bonds have soared, rising above 20% on two-year paper on April 18th. But what seems to be bad news may in fact be good.
Greek bond yields are spiking because European policymakers now seem to be acknowledging what this newspaper has long argued was inevitable: Greece’s debt will need to be restructured. Even Wolfgang Schäuble, Germany’s finance minister, appears to be open to the idea. The official line, admittedly, remains that restructuring is not an option; and the European Central Bank still has its head firmly in the sand. But the debate in Europe is finally shifting from how to avoid a Greek restructuring to how to do it (see article).
However, significant questions arise when considering the consequences of default. The four that seem of most interest are:
- Will Greece leave the euro?
- What will happen to creditors (i.e. large European banks) and the European banking system?
- What does default mean for people in Greece?
- Will a Greek default spread to other euro countries (i.e. will we see contagion)?