July 7, 2010

Wall Street Journal: "Not too late for Greece"

Michael Heise at the Wall Street Journal arguing against the "street wisdom" of a sovereign default for Greece:

" Conventional wisdom increasingly has it that the €110 billion European Union/IMF bailout for Greece will only delay a debt restructuring. The Greek economy, so the argument goes, could not possibly pull off the required austerity program.

But back-of-the envelope calculations supposedly showing Greece's inevitable fiscal death are somewhat exaggerated. The slashing of the Greek budget deficit (13.6% of GDP last year) is actually proceeding faster than planned. The consolidation program agreed with the EU and the IMF projects for this year a deficit of 8.1%. In light of the progress in the first five months of this year, Greece might even manage to undershoot this target.

That's partly because the government had already started to curb its spending—particularly on the investment front—before the EU and IMF imposed the current savings program. And if Greece implements the measures in full, more substantial savings will come in the second half of the year.

...Greece's predicament is anything but a lost cause. It does not make sense to rashly evoke an unprecedented sovereign default in the euro area, which would have unforeseeable consequences for other member states and the standing of the euro as an investment currency.

Driving the campaign for debt restructuring is often the desire to ensure that private investors foot some of the bill. But debt waivers would automatically also drag in EU taxpayers, who'd be left with at least a partial write-down on the loans their governments had granted to Greece. "

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