MarketWatch: Greek default is inevitable

By Mario Blejer


LONDON (MarketWatch) — The European Central Bank, with its staunch opposition to sovereign debt restructuring in Europe, is making a bad situation worse. By threatening to withdraw support for banks in countries such as Greece if they restructure their debts, the ECB is practically inciting runs on banks.

The argument that Greek state paper could no longer be used as collateral in such cases hardly justifies such a potentially destabilizing step. The ECB is effectively the lender of last resort to such banks. If depositors believe it is about to pull out, then they will withdraw money from the banks — and we will face a self-fuelling downward spiral.

The debt problem of peripheral Europe is structural. It cannot be solved by piling debt on debt. There is an analogy to a Ponzi scheme, under which more money is continually paid in to keep the pyramid-like edifice from collapsing. The debt/GDP ratio increases over time because new loans are given to pay old debt and to finance the remaining fiscal gaps.

In addition, the share of the debt in official hands continues to increase and eventually taxpayers bear the complete cost of the adjustment. This may, however, take time and, since the pyramid is unstable, the construction could break down at any moment –— a source of increasing uncertainty. ...............(more)

The complete piece is at: http://www.marketwatch.com/story/greek-default-is-inevitable-2011-06-10?dist=beforebell

Won't this put strains on the Euro and a lot of global banks and other institutions? What about the Greek government, its employees, and pension funds?

What is this - like a giant field experiment to see what happens later, when bigger debt bombs go off?

One problem is I hear they are only paying a third of their pharmaceutical bills. I wonder if their people will lose access to drugs.

I have a feeling their reality would be much harsher than the austerity they are under now.

The greek people need to print some Euros, and let the value of the Euro go down. The larger nations are refusing to let them take the only reasonable course to fix their debt problems. The larger nations would rather profit off the loans they made to Greece than make the country better.

By 'printing Euros', Greece would punish everyone in the Eurozone by devaluing the currency. Default would be aimed at the lenders, rather than the whole population of the zone.

Of course, the Greeks are far from innocent in this - they're not just 'victims'. They've failed to set decently high income tax rates, or collect it properly. And so they've run budgets they can't pay for - fairly similar to what American Republicans are proposing. The Greeks covered this up for a few years with misleading borrowing practices, and then the shit finally hit the fan and it was exposed.

The lenders should take some of the pain, because they should have realised the Greek government was a bad risk; but Greece has to fix its tax system, and work out how to live without borrowing large amounts of money.

Devaluing would be properly valuing in the best interests of all the nations in the eurozone, not just the wealthiest with the most control. Devaluing would be a good thing.


Austerity is an excuse to tear down their society to solve problems caused by predatory international finance institutions. Printing more Euros only punishes holders of wealth and lenders, not holders of debt. The debts of Greece could be repaid in full by printing money and the percent change in the money supply in the Eurozone wouldn't cause problematic inflation.

Greece was running a large deficit even ignoring the loan interest it had to pay. Even if you forgave all the debts the Greek government has, it would still have to fix its budget. It has the choice of putting up its taxes (which have been lower than Germany's, for instance), or implementing austerity measures.

The Euro is not, itself, overvalued; the rate at which Greece joined it was wrong - which made imports from other Euro countries into Greece cheaper, and its exports to them more expensive, which lost jobs in Greece.

Devaluing the whole Euro would make European exports, which are mainly from the stronger economies such as Germany, even cheaper. This would not fix things; but it would cause inflation other countries in the Eurozone; and why should Greece get money given to it at the expense of countries such as Spain? Many 'holders of wealth' are not banks who have made dodgy loans; they are individuals who have been prudent.

You still haven't said why you want whole populations to take the pain of fixing Greece's problems, rather than the irresponsible banks.

"You still haven't said why you want whole populations to take the pain of fixing Greece's problems, rather than the irresponsible banks."
default will hurt whole populations significantly worse than modest inflation caused by spending. It is certainly more fair than running the currency to maintain the wealth of the ultra rich at the expense of everyone else. Default and the resulting credit/financing freeze would result in less people suffering significantly worse than the questionable pains that would result from printing euros.

Rich people suffer when there is higher inflation. Bankers suffer when there is higher inflation. People who are <80% wealth and/or income are going to see a net benefit. The percent change required to print enough money to solve the debt crisis couldn't cause problematic inflation. At best it would cause modest inflation which would benefit people who need it the most.