debt, greeceAs we all know, Greece is teetering on the brink of default due to high debt to GDP ratio. What would be options available to the government and the corresponding consequences?
There are two main choices: Default or not, and stay in the Euro or not. That gives four combinations, and they’re all pretty bad for Greece.
Default but stay in the Eurozone. No one will lend Greece money commercially, and they’re still running a primary deficit, so they either have to cut spending much more sharply and immediately, or they have to find someone like the IMF to lend them more money.
Default and leave the Eurozone. They still can’t borrow money, but they can print their own money to pay the bills. Their new currency will devalue sharply as a result, and they’ll risk very high inflation. There will be years of lawsuits from disgruntled creditors whose loans get forcibly redenominated into new drachma.
Don’t default, stay in the Euro. Years or decades of economic austerity, paying back the crippling debt, with no way to inflate the currency to reduce the debt.
Don’t default, leave the Euro. I don’t think this is possible, since if Greece adopts its own devalued currency, the cost of its Euro-denominated debts will be even higher – and forcibly redenominating them would count as a default.
Most likely option is a managed default, with Greece receiving further loans from the EFSF in exchange for paying off part of its debt and not leaving the Euro.
It’s only partially true to say that “Greece is teetering on the brink of default due to high debt to GDP ratio.” - the reasons are much more complicated and interwoven than that, and worth a question in their own right.
However, Greek national debt has become unaffordable. And because it does not control its own supply of its national currency, its options are limited. Decisions about what happens next, also affect the rest of the Eurozone, directly (through the direction of fiscal integration) and indirectly (through possible contagion in the bond markets to other peripheral states with some related problems).
To curtail future problems, we may see a new Eurobond; we may see greater fiscal integration across the Eurozone. Eurozone states could each roll their first X% of GDP (40/50/60% - adjust to taste) of sovereign debt into Eurobonds; then anything on top of that would remain local to that state, with its own risk/reward profile.
A Greek default now may be orderly, or disorderly. It may result in a haircut for bondholders of somewhere in the range 30-80%. It may or may not trigger CDSs. There may be some combination of bail-out, perhaps swapping Greek bonds for Eurobonds, and some partial default.
Greece could leave the Euro; or the Euro could split into a North-Euro and South-Euro; or Greece could remain in the Euro.
Greece may choose to abandon austerity as a failed experiment, and instead try to grow its way out of debt; if it chose to bring more of its black and grey economy within the legitimate economy, tax receipts and GDP would both rise.
Or the ECB could engage in a large exercise of Quantitative Easing and buy up peripheral-state debt.
Or their could be a wide-scale jubilee, where some sovereign debt, and most personal debt, was cancelled. This could result in a large demand stimulus, leading to rising employment, rising productivity and tax receipts, and an end to the crisis.
I think the best option is for Greece to technically default by converting the currency drachma. Of course this would mean that Greece should leave the Euro zone.
Other option is that there is a central debt issuing agency EU this takes on all national debt and there is a fiscal union. This is highly unlikely but the best option to preserve the Euro. This would mean Greece cold remain in the EU and not default.
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