Economics Stack Exchange Archive

Why must Greece leave the eurozone if it defaults on its debt?

• posted by: Karajaru on 2011-11-19
• tagged: currency, debt, bonds
• score: 1

Given that eurozone states issue their bonds separately, and pay different rates of interest according to investors’ perceived risk of default, why is it accepted that a Greek default would mean Greece “leaving” the eurozone?

Some possible explanations:

• It is simply because a treaty forbids eurozone members from defaulting on their sovereign debt. That seems implausibly straightforward.
• It just means that Greece would no longer be able to sit at eurozone meetings. In this case what would stop Greece from continuing to use the euro as its currency unilaterally, like a number of other unofficial eurozone members (for example, Kosovo and Montenegro)?
• It really means that Greece could indeed continue to use whatever currency it wanted, but in reality it would “obviously” ditch the euro in order to cheapen its exports.

I have read widely on this subject, but no one asks or answers this question. Apparently the answer is too obvious! Please help.

NB: A closely related (but not identical) question has already been asked here. I was unsatisfied with the answer but couldn’t figure out a way to indicate this without posting a non-“answer” of my own.

Answer 585

• posted by: Mike Scott on 2011-11-19
• score: 3

Because Greece is still running a large primary deficit, which means that it has to continually borrow more money to keep its government running, even excluding interest payments and maturity on existing debt. It can’t currently borrow in commercial markets, whether or not it defaults. If it defaults without the consent of the EU and IMF (a “disorderly” default) then it can’t expect to get any more funding from them either. So in the event of a disorderly default, the only way it can avoid making savage cuts (much worse and faster than those envisaged under the current proposals) is to print more money – but it can’t print Euro, so it has to withdraw from the Euro in order to regain control of its own currency.

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