Greece: The bull case
Back in April, I noted with respect to Greece that “the bear case is terrifying, and the bull case is very hard to articulate”. So it’s extremely useful to have a clearly-articulated paper from the IMF, entitled “Default in Today’s Advanced Economies: Unnecessary, Undesirable, and Unlikely”, which puts the bull case much more vividly than I’ve seen it before.
At its heart is this table:
The idea here is that whether or not you default, you’re going to have to embark upon a large fiscal adjustment in order to get back into sustainable territory. And even if you default with a massive 50% haircut, the size of that fiscal adjustment doesn’t change all that much:
The needed adjustment in today’s advanced economies would not be much affected by debt restructuring, even with a sizable haircut. To be concrete, let us consider by how much the primary adjustment needed to stabilize the debt-to-GDP ratio could be reduced by applying a 50 percent haircut—exceptionally large by historical standards. The haircut would make a limited difference for the required primary fiscal balance adjustment: 0.5 percentage point of GDP on average, and 2.7 percentage points for Greece. In percent of the adjustment in the absence of haircut, the reduction in the needed adjustment would be less than one-tenth on average and less than one-fifth in the case of Greece.
That’s the “unnecessary” part of the headline; the “undesirable” is pretty self-explanatory. But as for “unlikely”, I’m not convinced. Here’s the paper:
The essence of our reasoning is that the challenge stems mainly from the advanced economies’ large primary deficits, not from a high average interest rate on debt. Thus, default would not significantly reduce the need for major fiscal adjustment. In contrast, the economies that defaulted in recent decades did so primarily as a result of high debt servicing costs, often in the context of major external shocks. We conclude that default would not be in the interest of the citizens of the countries in question. Fiscal adjustment supported by reforms that enhance economic growth is a more effective response.
Well, yes, we’d all like fiscal adjustment and structural reforms, and probably a pony to boot. But in the case of Greece, and probably other countries too, it ain’t gonna happen. Which is why they’re going to default.