Posted by jj on June 23, 2011 at 07:40:33:
1. Greece is insolvent.
No, it isn't. As economists Carmen Reinhart and Kenneth Rogoff have noted, sovereign defaults are typically about willingness to pay rather than ability to pay. Greece has plenty of assets and huge potential to cut spending, increase tax collection and improve productivity if it is willing to make sacrifices. Rather than solvency, Greece's challenge is whether the changes required are politically possible.
2. It is in Greece's interest to default.
Hardly. The country is still running a large primary deficit, so even if it inflicted 50% "haircuts" on bondholders, it would still need to borrow money immediately or face huge spending cuts overnight to balance the books. Worse, the Greek banking system would collapse as its capital was wiped out and its funding dried up; under European Central Bank rules, Greek government bonds would no longer be eligible as collateral. Nor would it make life easier if Greece tried to leave the euro, since this would likely trigger an immediate run on its banks.
3. A Greek default wouldn't be a Lehman moment.
Even the German government now seems to accept it was too complacent in imagining the market was prepared for a Greek debt restructuring. Despite Angela Merkel's climb-down last week, contagion effects have spread across the euro zone, notably to Spain, where bond yields have risen sharply. Germany's mistake was to consider only first-order effects on bank capital, whereas it would be the second-order contagion effects on government and bank borrowing costs that would do the greatest damage. Lehman was a severe market shock, but a Greek default could trigger a global slump as credit dried up around the world.
4. You can't keep kicking the can.
Yes, you can. Time is a great healer. Even if a Greek default becomes unavoidable, there are good reasons to delay it: partly to encourage Portugal and Ireland to stick to their bailout programs, but more importantly to reassure investors so they keep buying other peripheral European government and bank debt. The euro zone needs to avoid any defaults until countries like Spain and Italy manage to grow their way out of the danger zone. Indeed, much as it may upset German taxpayers, the euro zone may have to continue kicking Greek debt down the road long after 2013.
5. It's all Greece's fault.
Not entirely. Now that the euro zone has accepted it has little option but to bail out Greece again, its objective should be to ensure the bailout works. Yet the euro zone is charging Greece a punitive lending rate—nearly double what the European Financial Stability Facility pays to borrow or what the International Monetary Fund is charging—making Greece's task far harder. This makes no sense. The only sensible way now for the euro zone to minimize moral hazard is to agree to closer political integration. Sooner or later, Europe's leaders will have to face up to this reality.
[Photo Galleries ]
[Upload your Photos ]
[Nostalgia Board ]
[Go to Castlebar ]
[West of Ireland Photographs]
[Why not become a contributor to this website? Logging in and submitting an article to Castlebar.ie is easy. For help see our contributors' section.
In submitting this post for publication I agree to the Terms and Conditions of the Disclaimer