The Alternative

04/11/2011 at 12:26 pm 2 comments

This week, Greek Prime Minister Papandreou reminded the world that his countrymen didn’t just invent drama and democracy: they also invented the circus.

Doubtless he saw his shock call for a referendum as a Machiavellian masterstroke – a means of suborning domestic opponents while strengthening his bargaining position abroad. But it was clear within hours that he had overreached himself. (The full extent to which he has done so remains to be seen.)

It is worth looking at some of the consequences for his country should his implicit threat of unilateral default / euro withdrawal ever be carried out.

First of all, the currency. Most commentators assume that unilateral Greek default would entail the sacrifice of eurozone membership. (This is not necessarily true. Neither the default of Cleveland, Ohio in 1978, nor – if you prefer to think of the eurozone as a fractured collective – the default of Ecuador thirty years later resulted in either borrower choosing, or being encouraged to leave, the US dollar. But let’s assume Greece went back to the drachma.) There would be rapid depreciation – indeed, the possibility that the currency could cease to be transferable internationally. (The Icelandic krone threatened this at the nadir of the recent crisis with the result that the supply of imported food was jeopardized.) Even if the drachma were tradeable, immediate, rapid inflation would occur. At the same time, bank deposits and other assets would have to be re-denominated, decimating the wealth of the nation overnight. These twin effects would demolish household and business consumption and consign the country to a further period of sharp economic contraction.

All well and good, say the defaultists. But at least Greece would be free of her debt!

Yes, and no. Greece is still running a budget deficit and in the catastrophe scenario this would get worse. So unless the Greeks wanted total state shutdown, they would still have to borrow money. Who would be the lenders? The EU; the IMF: exactly the same people who are lending to them at the moment. The conditions imposed by those lenders – who would still have effective control of the country’s economy until their loans were repaid – would be at least as punitive as the conditions they’re imposing now. In other words, there would be at least as much austerity to contend with, and possibly more.

The trajectory which is currently planned for Greece amounts to a relatively benign version of sovereign default. The alternative would be harsher, crueller, and much more damaging.

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Watch Those Bonds Home Truths


  • 1. Moving On « The Blog @ Vigilant Financial  |  02/12/2011 at 4:06 pm

    […] release of the EU component of the nation’s bailout money – thrown into jeopardy by former PM Papandreou’s referendum call – was agreed on Tuesday night. The IMF is due to approve its €2.2bn share of the €8bn aid […]

  • 2. PIGS Might Fly « The Blog @ Vigilant Financial  |  29/06/2012 at 4:03 pm

    […] course we know what happens to all of us in the long run. And the short run consequences are not likely to be pleasant – indeed, can be terrifying. In Iceland only four years ago, for example, the currency became […]

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