Greece Should Default

Well the Greeks have been bailed out, or so it is claimed. But the facts are that it is not the Greeks that have been bailed out, but some of the lenders to Greece. The ECB will receive full payment, courtesy of a bond swap. This swap has made it clear that private owners of sovereign debt are in the real world subordinate to public owners. In this case, the private owners will take a substantial haircut but get some money.

The people of Greece will not get any money. The new loan goes into an escrow account from which it will be disbursed to meet debt servicing needs, but not to fund Greek public expenditures. The Greek government will be funded only by whatever it can collect in the form of taxes. This is exactly the situation that it would have found itself in had it defaulted, except that it still has debts of over 120% of GDP (in the best case). So Greece has managed to find the worst of all possible worlds – a massive overhang of debt, and a forced cut in government spending. Apparently tax collectors in Greece were told over the weekend that they would have to be 200% more effective in collecting unpaid taxes. Good luck with that, as the low-hanging fruit has already been picked, I imagine.

Iceland, in the meantime, which repudiated the debts of its overgrown banks, is looking good. Now that’s a somewhat different situation, in that it wasn’t the sovereign debt that was the problem, but rather the private debts of a few large banks – similar to Ireland. But still.

In my opinion, Greece should not accept this deal. It is ugly in all dimensions; escrow, debt subordination, inadequate haircuts…  Even if Greece does not choose the best option – simply to default – then at the very least it should bargain for, and get, some mitigation of the economic collapse that will result. The threat of default or eurozone exit gives Greece more power than it has exploited to date.

Just my opinion.

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