Tuesday, May 29, 2012

What should Greece do?

The best solutions are usually the simplest. Perhaps Greece ought to just not pay some of its creditors. If they can survive without taking further debt, why should they care about their credit-worthiness? What good is an excellent credit score when you are starving or when you are a slave to the gods of northern Europe? At least that is one way of looking at the situation. 

Here is Jean-Baptiste Queru writing about Greece on his Google Plus
What if Greece defaults?

I've been thinking a lot about Greece in those last few days. Along the way I've learned a lot about the tumultuous history of modern Greece.

At this point, I'm asking myself: "what happens if the Greek government defaults?"

Greece has defaulted in the past. In fact, modern Greece had already defaulted before is was even a country, and it's been in default for about half of its history.

Until recently, a new default was unthinkable in my mind. The public sector is vital to Greece, so large that the country would sink deeper in recession if the government wasn't able to pay its workers.

I was missing one data point: Greece has almost reached the point where it can run its government on tax income alone. That's better than most countries, and that's the best that Greece has ever had. From that point of view, Greece is now one of the best-run countries in Europe.

What's hurting Greece is the debt. Essentially all of the budget deficit is caused by the interest on the debt.

Investors knew that Greece was a risky investment. That's why the interest rates were that much higher compared to other countries: the difference is the risk. Investors knew that there was a risk that Greece wouldn't be able to pay its loans back, but they also got Greece to pay more as long as it was able to pay.

Greece now has to take new loans to pay the interest on its existing loans. That's obviously unsustainable, it's a guaranteed death spiral. There's no way Greece will be able to entirely pay either the existing loans or any new ones, at least not in any timeframe that matters for most investors.

Maybe the time is right for Greece to stop taking new loans, to stop paying the existing debt, to run a balanced budget, and to negotiate manageable terms on the remaining loans after growth returns. Being able to run without new loans, Greece is now in a strong negotiating position.

Maybe it's time for Greece to be run by young blood, away from the nepotic oligarchies of the two traditional parties. Maybe it's time for Greece to be run by entrepreneurs and engineers, away from lawyers and economists.

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