Why Greece might not default any time soon
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Anna Gelpern has the smartest take on why Greece won’t default, which kicks off with this powerful truth:
As a descriptive matter, the global political commitment behind the no-restructuring option is without precedent. And sovereign debt is nothing but political commitment.
She adds a number of other good points, including that default wouldn’t actually do Greece all that much good:
A debt restructuring now is unlikely to bring needed debt relief for Greece. Among other things, Greek banks are massively exposed and would need to be recapitalized by the defaulting government or the foreign public sector. True, Argentina did it before, but it got the benefit of stiffing a bunch of foreigners for free in the bargain, which is not a foregone conclusion here. And Argentine officials could afford to stick it to local pension funds for internal political reasons. Don’t think Greece compares.
A debt restructuring now does not spare Greece the pain of adjustment – perhaps it does not even make much of a difference for the quantum of suffering. Paul Krugman says Greece is set to suffer in the extreme even if it defaults completely. And it will not default completely.
And on top of all that, the dominoes which would start falling in the event of a Greek default are Greece’s biggest export markets.
None of this changes the fiscal mathematics, of course. But Greece has an enormous amount of low-hanging fruit in the form of uncollected taxes on undeclared income, and although it will take time to start collecting that extra money, time is exactly what the EU has just provided, and is likely to continue to provide. After all, I don’t think anybody really believes that a Greek failure to follow to the letter every last IMF condition will mean that the country is immediately cut off and left to its own devices.
Greece will be a significant credit risk for the foreseeable future, if only because it needs external support to be able to service its debts. But Europe has now shown that Greece has that external support. Which means that default has moved from a real near-term possibility to something further off.
All of this is reasonably compelling — if Europe is serious about yesterday’s trillion-dollar package and it comes together as announced. Which brings us back to the question of political commitment. It’s clearly not there from the UK, which has loudly opted out from the whole shebang. Is it there from the rest of Europe?
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1. I believe GR collects about 4% of GDP in income taxes vs EZ average of 8%. No doubt it would be a very good thing for GR to tighten up collections, fire bribe taking tax collectors etc. but that is long term painstaking work, which is hard to organize while bank branches are being set on fire with loss of all employees inside and you are having to ring the Parliament with riot police. Furthermore an increase of 4% of GDP in tax collections will not solve this problem. In fact I suspect that 100% compliance with income tax would maybe just worsen the problem – as that money would then be applied to interest on debt held by nonresidents, thereby shrinking the GR economy.
2. The IMF program for Russia was announced in late July 1998 and the program was abandoned in mid August 1998. So the IMF can certainly move quickly when they want to – especially when the patient resists IMF administered bleedings and leeches. Don’t count on the IMF sticking with GR through thick and thin- they have a long track record of recommending suicidal policies then abandoning the patient when he objects.
After reading Gelpern’s piece I can’t agree with your high opinion of it. I’ve already commented once so will be brief- her point #4 is that Greece’s trading partners would be hurt if Greece stops paying on its debt.
But Greece already can’t pay its debt; it has a yawning primary deficit. Its trading partners are now on the hook for 20 billion euros a year (GR’s primary deficit, which GR can no longer finance itself) plus the trading partners now have to pay themselves the debt amortization out of their own bailout package.
The other points are almost as contradictory or paradoxical.
What you call a powerful truth is a bit silly. It’s like Fred tried to stop drinking in the past and it didn’t work but now he’s going to do it because he’s really serious and committed. What kind of an argument is that?