September 25, 2011

Reasons to persist and reasons to give up

Article (I saw this via the Living in Greece Blog) about "Why Greece should default" by Michael Shuman

"The general thinking is: Why take the risk? Keep bailing out Greece.

The counter argument, though, is that we'd all be better off if Greece just defaulted. I've made the case before that a continued bailout of Greece was a bad idea, and the more I watch what's happening in the Greek crisis, the more I think Athens needs to just throw in the towel, default, and start over.

First, a Greek default is inevitable. It is not a matter of if, but how. A default is built into the terms of the proposed second bailout package, in which private creditors are expected to swap or roll over their holdings of Greek bonds, taking a loss in the process. That would be an “orderly” default, perhaps, through which the process could be carefully controlled to minimize the impact on financial markets compared to a “disorderly” default, in which Greece just says: “We won't pay!” But it is still a default.

Second, because of that reality, investors are already assuming Greece will default, and are preparing for it."

The reasons Shuman provides in his other points: that economic contraction makes the math of the austerity program an impossible formula for success, that the turmoil being fostered in Greece is cruel and unnecessary, with the weight of the problem of the over-extended European lenders being put almost entirely on Greek backs. In the end, Shuman is saying it is inevitable and putting it off is only creating more damage.

Complete article at Curious Capitalist


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