Friday, April 22, 2011

Greek Default: Starting to Look Inevitable

The Economist notes a change in tone this week regarding Greece:
Latin lessons

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).
Managing 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.

However, significant questions arise when considering the consequences of default. The four that seem of most interest are:
  1. Will Greece leave the euro?
  2. What will happen to creditors (i.e. large European banks) and the European banking system?
  3. What does default mean for people in Greece?
  4. Will a Greek default spread to other euro countries (i.e. will we see contagion)?
Yesterday I shared my thoughts regarding the question of whether Greece will leave the euro. I haven't seen a lot of writing specifically addressing the other three questions, however, and would welcome tips. Regardless, I'll be thinking through some answers to those questions myself over the coming days.


  1. Gustavo10:22 PM

    1. I agree that Greece will leave the Euro, not because of the banking system but because of unsustainable social unrest.  the bank run could be stopped with a full blown guarantee of the ECB up to a certain amount, which is so credible that in reality people would not withdraw the deposits.  however, that doesn't solve the unemployment issue.  That's why the corralito in Argentina lasted a month: deposits stayed in, but jobs did not show up. 
    2. the ECB will draw a line and support those banks in healthy economies 
    3. default (and devaluation) means a wipeout of euro savings for greek people.  however, it also means a new, clean start.
    4. i think it will.  portugal and ireland will follow.  and the buck will stop in spain, it's  too big to fail, and still with a chance to recover. 
    my 2 cents! best

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