All Things in Moderation

Everyone is anxiously waiting to see the results of Greece defaulting on its debt and how it will affect the rest of us. Are they really going to default? It appears there’s not much left to try even though the confidence boosters keep trying to delay the inevitable and give us happy talk while we wait.

I’m not much of an economist and so I thought this piece in the NY Times was a good read about where things stand and where they’re headed, especially for those of us who are interested in the story but can’t quite wrap our minds around the global market and what a Greek default might mean for us.

We could call it “Greek Default for Dummies” (like me). Hopefully some of you reading this will have more to say. There was a piece in the Financial Times I couldn’t get to because of a pay wall. Maybe someone here could give us the hightlights?

Greece Nears the Precipice

A few highlights from the piece:

A default would relieve Greece of paying off a mountain of debt that it cannot afford, no matter how much it continues to cut government spending, which already has caused its economy to shrink.

At the same time, however, there is a fear of the unknown beyond Greece’s borders. Merrill Lynch estimates that the shock to growth in Europe, while not as severe as in the aftermath of the financial crisis of 2008, would be troubling, with overall output contracting by 1.3 percent in 2012.

While other countries have defaulted on their sovereign debt in recent times without causing systemic contagion, analysts weighing the numbers on Greece note that its debt is far higher, so the ripple effects could be more serious.

Total Greek public debt is about 370 billion euros, or $500 billion. By comparison, Argentina’s debt was $82 billion when it defaulted in 2001; when Russia defaulted, in 1998, its debt was $79 billion.

Willem Buiter, the chief economist at Citigroup, presents two possible default outcomes. In the first, Greece forces private sector creditors to take a loss on their bonds of 60 to 80 percent but manages to stay inside the euro zone by keeping current on the smaller amount that it owes its official lenders, like the European Union and the I.M.F.

While technically a default, the loss would not be an outright repudiation of Greece’s debt and the contagion could, in theory, be contained.

One big unknown revolves around the fact that, unlike other countries that have defaulted on their debts in the past, Greece does not have its own currency.

The potentially more dangerous default outcome is if Greece decides to leave or is forced to leave the euro, according to Mr. Buiter. Then, Mr. Buiter believes, the debt write-off would approach 100 percent and the effects on international markets could be much more serious.

Filed under: default, EU, Greece | Tagged: austerity |