We have the specter of Greece’s finance minister insisting really, no really, it will never never default, or default via restructuring. Now given the unfortunate accident of timing, these protests sound awfully Dick Fuld like, although the better parallel is probably Mexico, which kept insisting in 1994, no way, no how would it need to restructure, despite having a lot of dollar denominated obligations and an untenable currency peg. And it was OK, until it wasn’t.
From the Financial Times:
Greece’s finance minister has strongly rejected the idea that Athens will be forced to restructure its debts, saying that a default would break the eurozone.
On a two-day visit to London, Paris and Frankfurt to convince investors that Athens has turned a corner in its year-long economic crisis, George Papaconstantinou told the Financial Times that a Greek default would spark selling in other so-called peripheral bond markets of Portugal and Ireland.
“Restructuring is not going to happen. There are much broader implications for the eurozone should Greece have to restructure its debt,” he said.
“People fail to see the costs to both Greece and the eurozone of a restructuring: the cost to its citizens, the cost to its access to markets. If Greece restructures, why on earth would people invest in other peripheral economies? It would be a fundamental break to the unity of the eurozone.”
Yves here. The logic is not exactly encouraging. It isn’t a fact based “Greece can manage to get its gaping primary deficit and whopping government debt to GDP down,” probably because credible data to support that argument would be hard to muster. Instead, this sounds a lot like how Kim Jong Il must negotiate: “I can blow my neighbors up, so it makes sense for you to buy me off.”
If Greece were the only country in need of help, this still might be a valid argument, since the eurozone certainly has the capacity to rescue Greece. But where does this leave Ireland, Spain, and Portugal? How can their citizens be expected to make sacrifices if profligate Greece gets a big handout?
Another little problem with the “we won’t default” (and a restructuring is just a tidier route to the same end, debt renegotiation) is that Greece and default are on a first name basis. As Ken Rogoff noted:
But the problem is not only the numbers; it is one of credibility. Thanks to decades of low investment in statistical capacity, no one trusts the Greek government’s figures. Nor does Greece’s default history inspire confidence.
As demonstrated in my recent book with Carmen Reinhart This Time is Different: Eight Centuries of Financial Folly , Greece has been in default roughly one out of every two years since it first gained independence in the nineteenth century
The one factor that makes the Greece bluster credible is if it is the earliest periphery country to hit the wall, which is entirely plausible. It would get assistance, but the cost would make it much harder for any other EU country to come to the trough. This might give the idea of first mover advantage an entirely new meaning.