Greece should default and reschedule

February 15, 2010

The drama unfolding in Athens contains all the usual ingredients for a modern crisis. Poorly disclosed derivative transactions. Inadequate accounting for off-balance sheet liabilities. Investment banks eager to structure complex transactions in return for fat fees. And a furtive but gullible government that thought it could get something for nothing.

Life is a lottery; some loans go wrong in the ordinary course of events. But behind every really bad loan or class of loans, like subprime mortgages, there are greedy and foolish bankers and equally culpable borrowers. Greece is no exception.

The Greek state has only itself to blame for manipulating accounting rules and derivatives markets to run up unsustainable debts. But the banks that structured those transactions are hardly blameless and cannot really complain if they do not get all their money back.

One part of the problem is the use of swap transactions to provide upfront payments to the Greek state in return for deferred payments, ensuring Greece would scrape in under the Maastricht criteria for euro membership.

Swap transactions involve the exchange of one stream of payments for another. But these are confidential bilateral deals. The terms need not be actuarially fair or at current market prices.

In this instance, the terms of the swap transactions ensured that Greece was a net recipient of funds in the early years but would pay the money back later.

These were credits. But because they were structured as swap transactions rather than loans they did not have to be recorded as debt or count against the country’s compliance with the Maastricht criteria for eurozone membership, which was precisely why they were so attractive.

The swap transactions were perfectly legitimate. They were not the only cause of this crisis. But they have helped Greece accumulate more debt that would otherwise have been possible, pushing the country closer to the brink.


Most commentators have concentrated on the need for the EU to bail out Greece. But in reality any rescue would be another subsidy for excessive-risk taking by the country’s bankers and the institutions that have sold credit default swaps (CDS) on Greek debt.

Forcing the country into an austerity programme and arranging an emergency loan from other EU members or the IMF would ensure the bankers got their money back (again), but inflict years of misery on the country’s households and businesses.

If market discipline is ever to be re-established after the boom and bailouts of the last five years, it is imperative creditors face the real prospect of making losses if they extend large loans and fail to price the risk on them properly. The sellers of CDS insurance must face up to making real payouts in return for all the premiums they pocket.

Bailing out Greece would be wrong. Not because it would harm the eurozone’s credibility, but because it would reinforce the rampant moral hazard in financial markets. It would perpetuate the inequitable and politically unacceptable situation where structuring fees are retained by the banks as private profits while credit losses are socialised and passed onto taxpayers.

Greece would do everyone a favour by declaring a moratorium and forcing a rescheduling. The country faces years of misery in any case. The threat of being shut out of capital markets rings hollow. But by triggering losses on these derivative transactions and a credit events under the CDS it would help ensure a much more prudent approach in international banking markets.

Bailing out Greece so everyone can pretend the country can remain “current” on its loans when it patently cannot would simply deepen the moral-hazard crisis. If market discipline is ever to be re-established (something which everyone agrees is desirable) then at some point creditors must take a loss. Greece is a good place to start.


The other slightly Alice-in-Wonderland aspect of this crisis is the long list of banks, countries and institutions demanding Greece undertake brutal budget cuts to honour the bankers’ loans and before any emergency assistance can be pledged.

These are the same banks, countries and institutions that urged pro-growth policies in response to the subprime and banking crisis to avoid a deflationary spiral and widespread default. It seems shock therapy is appropriate for Greek households (“pour encourager les autres”) but not U.S. homeowners or the banks themselves.

After bailing out American homeowners and the banks themselves in 2008-2009 with vast quantities of cheap money, fuelling moral hazard, governments and financial markets have suddenly discovered a new commitment to fiscal rectitude — mostly someone else’s rectitude.

Fiscal consolidation (the polite term for tax rises and spending cuts) is an essential part of Greece’s debt workout. But the trajectory is crucial. Greece is being asked to undertake rapid consolidation mostly for symbolic reasons to maintain the EU’s commitment to treaty-purity even though it will push the country into a deep downturn, slashing incomes and budget revenues.

But “liar loan” mortgages to subprime households are not much different to the debts Greece has run up. If rescheduling and a gradual workout is a desirable outcome in the United States and the rest of Europe, to share losses more widely, it is hard to see why similar restructuring should not be the optimal outcome in Greece.

In the rest of North America and Western Europe, exceptionally low interest rates and central bank programmes to buy mortgage-backed securities and other instruments have provided a disguised form of rescheduling (in favour of lenders and borrowers, at the expense of long-suffering savers and taxpayers).

In a similar vein, there is a strong case for Greece’s debts to be defaulted and rescheduled (at the cost to creditors and sellers of default swaps) in order to share the burden more equitably between banks (who have profited handsomely from their transactions) and the local economy.


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Fully agree

Posted by 5485 | Report as abusive

I do perfectly agree. Some banks and merchant bankers will pull us very far under. It is about time to discipline these so-called capitalists who are in reality western-type boys and girls.
The system ought to be re-thaught. How about un capitalisme à visage humain, you remember, Jacques Chirac?
I do have some ideas on that, specially on banks and derivatives. As an economist, one has to explain to me what is the economic merit of a CDS when the lender is in fact being paid to undertake a risk. Why reinsure what is already insured and do not make a mistake this is not like reinsurance.
Tahar Mansour, Ph.D.

Posted by tahar | Report as abusive

I have some 30 years of experience in Sovereign defaults, starting from before the Default Domino triggered in the 1980’s by some Latin countries, through the Asian and Russian defaults of 1997/1998 and the contentious Argy default in 2002 I was also the first to successfully sue Sovereigns to collect, way before Elliot appeared on the scene. I agree. A greece default is inevitable. There is no way a country with 4.5mm work force can service some Eur 300b in debt. Not counting those owed by the country’s banks and state owned institutions. BUT first it would have to be expelled from the EMU and adopt the Papandreou (or Drachma, their choice).. and the collateral risk can be seenin Argentina and Iceland today ..a bridge solution is if Greek billionaires band together and loan Greece the 8b it needs in April..

Posted by Bludde | Report as abusive

I agree with the need to default and the hand this would give to market discipline. However, I do not go as far as saying Greece needs a bail out as TARP and all the other stuff. This would equal the US government launching a TARP like structure for itself. We are not talking about bailing out the Greek shipping magnates or insurance companies but the guy who writes the rules in his own turf, namely the government itself.

In case of default, this should be an organised one, with liquidity lines in place for banks in PIIGS countries to withstand the wiping out of their collateral. The moral obligation to owning up to having issued the debt is the governments, not the banks or the private sector in general.

Posted by lisandro | Report as abusive

[…] Kemp of Reuters, meanwhile, has come at the issue from another direction: Most commentators have concentrated on the need for the EU to bail out […]

Posted by FT Alphaville » In praise of market discipline | Report as abusive

Greece is not much different then America. There is crisis coming to America too. We need to stop spending.

Posted by servant119b | Report as abusive

Dear all,
Although I can share some of your views that a re-negotiation of debt could under circumstances be favorable (for Greek taxpayers), I cannot understand how these would be feasible in the current momentum.
Furthermore, if I understand correctly, it is your suggestion that a “Lehman Brothers” model should be used in the specific case (ie “let the bad guys fail”). What exactly is it that makes you believe that this time this approach will actually work better and lead to global redemption through the “punishment” of the rogue elements of financial markets? I think that this is, more than anything else, an “Alice in Wonderland” approach.

Posted by Yiannis11 | Report as abusive

Could we do the same thing here in the States? What’s the worst that would happen? The Chinese would be left holding the bag. Should we care? I, for one, wouldn’t. They take our money and sell us products that don’t work properly, fall apart in six months, are dangerous, poisonous, contaminated and just plain badly designed. Default USA! That should be the next Sarah Palin rallying cry.

Posted by IntoTheTardis | Report as abusive

Academic since the EU will not allow a default and the harm to the EU of such a default at this point was not really discussed in the article.

Greece is essentially like a city in its politics and budgets and it has had to carry a huge defence budget due to threats from Turkey on top of that.

Essentially withthe bailout the EU will be doing what the US does all the time with its cities. The US can print money, its cities and states can’t and are bailed out in teal terms all the time.

The entire article is an exercise in what won’t happen any more than the US would sell California to the Mexicans.

Posted by DavidD | Report as abusive

[…] tend to lean towards what John Kemp writes in Reuters: Most commentators have concentrated on the need for the EU to bail out Greece. But in reality any […]

Posted by Streetwise Professor » Shocked! Shocked! | Report as abusive

[…] a longshot. The media have begun to pick up on the general dissatisfaction: Reuters argues that the least-bad outcome is for Greece to default, let its creditors take the hit (and for a clear explanation of why Goldman Sachs would be able to […]

Posted by Let Them Stew In Their Own Greece – Hit & Run : Reason Magazine | Report as abusive

Correction: The United States has done nothing to bail out decent everyday (i.e. not those employed by Goldman Sachs) U.S. homeowners, who are still very much at risk. Perhaps the Chinese will step in, or Venezuela, or Europe. We’ll see.

But one thing’s for sure, it won’t be the gang of thieves in league with present and previous U.S. Governments.

What Treasury does is gaily bail out voodoo lenders and self-appointed reserve bankers whose manifold leveraging of diluted mortgage gash along with a whole slew of other worthless paper almost made it “look like” they were doing real business with real assets to back it all up, which garbage they foisted on complicit fellow bankers overseas.

It doesn’t matter to the progenitors of such folly that they bankrupted entire countries in the process – not yet, anyway.

All roads leading to this hideous crisis can be retraced to New York City, where some of the biggest and dirtiest default jockeys of all time still hang their shingles. To the European mind these entities need punishing in ways that leave a serious mark, no two ways about it.

That’s why it matters what happens next in Greece. Either the wrongdoers are held to account for the damage they did now, or they will surely pay ere long, with interest.

Posted by HBC | Report as abusive

Greedy in Greece does not have the luxury of fooling the people anymore. Let those fleecers share some of the burden.

We in America already got fooled and moved all the burden to the poor while the greedy glut on their spoils.

Time to roast the pigs before we are too weak to walk.

The Greece are actually in a fortunate position now to default. We will be bled for generations while the parasite greedy suck our blood.

Posted by Butch_from_PA | Report as abusive

[…] 16, 2010 10/02/15/greece-should-default-and-resch edule/ Posted by rmfnewsclippings Filed in Uncategorized Leave a Comment […]

Posted by Reuters Blog: Greece should default and reschedule « RMF News Clippings | Report as abusive

Isn’t it interesting. That first the Marshall Plan rebuilt & made Europe financially sound. Then with trillions,not billions of American dollars & lives we got rid of Communism. Then all of of Europe wanted to make the Euro Zone to be able to compete with America,Asia & the rest of the world.So now we have the Euro Zone & what happens? There little cousin comes in from the country (Greece)& there goes the Euro Zone. I guess it would be easier just to send all the Greeks to Astoria,New York & flood the entire country. But wait,what will happen when it happens to Italy,or France ? I guess they can always go on strike to get healthy.

Posted by free4me | Report as abusive

An excellent article. Thanks, Reuters, for putting is so succinctly: The Greeks used sneaky dirty tricks to hide huge unsustainable loans to cover their irresponsible overspending. It is only right that the guilty players be made responsible and accountable for their corruption.

Posted by Anthonykovic | Report as abusive

EU should “sell” Greece to Turkey, just like Russia sold Alaska to the US. Since the government debt of Turkey is stated as only 36% of their GDP, they have the means to pay for this transaction, especially if they can sustain their growth rate of the last few years. They also have a good track record of paying their obligations. Greeks and Turks have a long history of living together anyway.

Posted by localmichael | Report as abusive


Posted by KirkD | Report as abusive

As a Greek citizen, I believe we made huge mistakes by believing in Governments that kept promising the world to us. We have repeatedly voted for corrupted politicians who have now carved the system to their own measures and cannot (and will not) get any punishment for all the grievance they caused to this country.

However, I firmly believe that we are being attacked by opportunists who just want to make $$$ out of a crisis. I wonder if Germany is about time to repay the long-standing debt to Greece since WWII, and if we EVER gonna get our compensation for faulty submarines they “pressurised” us into buying. And what about the other artillery sellers, who were rubbing their hands whenever a crisis with Turkey took place….and where is the EU support, when we needed Frontex to protect Greece’s borders(=European borders) from illegal immigrant and Turkish threats?

nuff said…world…think about this one!

Posted by Alex_Pgreece | Report as abusive

The comparison that some have made between the US bailing out companies/states and the EU bailing out Greece is a very short-sighted and narrow view of the situation. For one, the US has a debt to GDP ratio of only 40% (the highest in a long time) and only the most pessimistic predict it will go over 50% in the next few years. By comparison, most EU countries have well over 50% debt to GDP already. Also, EU does not have one central government, so it would be analogous to one state bailing out another, not a federal government bailing out a state.

The truth is the US has made it’s decisions and has to live with them. Us Americans did not get any hand-out here, we will have to deal with the bad side of our decisions in the future. What needs to happen is that the Europeans need to weigh the cost and benefit of bailing out Greece and not bailing out Greece. They should do this openly and create a discussion. But be quick about it, tragedy is around the corner.

Posted by terets | Report as abusive

Greece is not bankrupt and need not default. It faces a liquidity crisis, in part because of a speculative attack on its economy that has driven up its borrowing costs to crippling levels. With support from the EU, those borrowing costs can be contained and Greece’s obligations can be met. Denying Greece that support and forcing her to default would have huge adverse impacts, way beyond Greece alone. It would reward the short-sellers now targeting Greece –and the Euro- and encourage them to attack other eurozone countries suffering disproportionately under the current economic downturn. That is also a moral hazard we do not want to foster.

Posted by CWCanada | Report as abusive

make solar energy the national currency! serious. Suncoins as I call them, are coins that also make electricity. That will put the bankers into a tive. Coins made of metal were valuable back in 1000BC, because metal was in short commodity. Plus, they could easily be made into swords for resell. Making solar energy the national currency, would allow people to put suncoins on their rooftop as a bank, and if anyone wanted to purchase anything they could take the coin off their roof. The rooftop bank would provide interest via electricity. The more suncoins, the more electricity. The sun shines everyday, even if the bank collapses.

Posted by solarsmelters | Report as abusive

Oh come on now. The man that wrote this article has no clue of what’s happening in Greece now. He judges the Greek problem with criteria of the last financial crisis. It’s not the banks, at least not 100%. The problem here is deeper and there are more than one to blame. The corrupted people are to blame, the corrupted politicians are to blame, the politicians that feed the people, the people that feed the politicians. This may sound simplistic but it’s difficult to explain now. Anyway, the bottom line is that the whole system here in Greece is decadent. Some Greeks now realize that. And any kind of support from the EU, will not help the banks, but the bleeding people. At least psychologically.

Posted by Anti | Report as abusive

This wild spending and borrowing has to stop somewhere. The politicians are at it again. Time to default and rebuild the whole government, not just the elected officials. It has happened many times in the past and it will continue as long as the spirit of greed is tolerated.

Posted by fred5407 | Report as abusive

somebody’s going to end up standing in a soup line. crapitalism has fallen and we taxpayers are left ‘holding the bag’ and it’s full of nothing but…well, you know. the trick now, is for the rich guys of the world to pass on their losses while picking up their bonuses! this is where their brilliance shines so brightly. unfortunately, we fools who carry them on our backs are too blind to see it. (lack of the appropriate phds, i guess…)

Posted by jborrow | Report as abusive

Although I can partly share your views that a default would under circumstances be “beneficial” for greek taxpayers, I cannot however see how these circumstances would materialize in the current hostile environment.

Furthermore – please correct me if I am wrong – I understand that you recommend a repetition of the Lehman Brothers model, i.e “let the bad guys who lended / borrowed” recklessly take the cost”. It is this model that in countries other than Greece has led to the increase of sovereign debt and to an extent to the waste of taxpayers’ money. What exactly is it that makes you believe that this time “the system will be purged” and all of a sudden the “burden will be shared equitably by banks”? Is this perhaps yet another “Alice-in-Wonderland” aspect?

Posted by Yiannis34 | Report as abusive

When a credit card company basically tricks an 18 year old to run up a debt, or a bank tricks a high school dropout into a mortgage beyond their means, the bank has responsibility. Greece is different, Greece is presumably run by adults with some level of education, they cant claim being tricked and that they don’t understand debt. They were smart enough to find a sneaky way to get loans just like they’re smart enough now to try to find a way to not have to pay them.

Posted by NewsReader2 | Report as abusive

Everyone seems to have forgotten the Asian Financial Crisis! At that time, the Asian government were told by the gurus, IMF and World Bank to take the “bitter pill” and to bear the burns. What happen to those thoughts now? Isn’t the Greece and some other government facing the same situation as those by the Asian government back in 1997?

Posted by Fairgames | Report as abusive

Greece should just default. Declare it now. So shall it be written so shall it be done.

Posted by vinman1 | Report as abusive

Εθνική Υπηρεσία Πληροφοριών … thanks… short the olives…season is bad…very bad

Posted by vinman1 | Report as abusive

The key is the Asian government for example like Thailand and Indonesia, after taking the “bitter pill”, have since recovered well! The basics is really you don’t expect to spend your future earning and expect someone to come to your rescue without costs?

Posted by Fairgames | Report as abusive

The 3% budget deficit constraint that every member country of the Euro-zone has to abide by was not set yesterday – it was set back in 1999 when the Euro-zone was created and it was the prime condition to be satisfied for any country that wanted to become a member of the Euro-zone. With all the data coming out into the light, it is clear that Greece never met that precondition. They were able to “mask” the true state of their finances by securing deals from Goldman and others. Those deals were made on Greece’s own request and not the other way around. Greece cheated their way into the Euro-zone and now have the whole system held hostage to the crisis caused by their lavish government spending. Greece is perennially one of the biggest arms buyers in the world spending several tens of billions on various expensive weapons systems, while being a NATO member since 1949 with continuous NATO and US presence on its soil throughout the cold war. They were locked in decades-long arms race with – Turkey of all countries, another NATO member. Correct me if I am wrong, but to me personally seems totally impossible that two NATO members would ever be engaged in a war against each other. NATO is supposed to be a collective security system. The Greeks are plagued by an irrational mentality which is the only explanation on how they managed to amass a national debt of 170% their GDP. Now that the chickens have come home to roost, Greece wants a bailout. I don’t think it’s gonna happen. There is no way they are going to persuade anybody inside EU to land them money, specially since now everyone knows how they became a member of the Euro-zone in the first place. They are headed for a default and a major restructuring of not only their economy, but their elitist mentality as well.

Posted by AlexZ83 | Report as abusive

[…] a longshot.The media have begun to pick up on the general dissatisfaction:Reuters argues that the least-bad outcome is for Greece to default, let its creditorstake the hit (and for a clear explanation of why Goldman Sachswould be able to […]

Posted by Let Them Stew In Their Own Greece – – deep web news radio | Report as abusive

As AlexZ83 stated, Greece was a cash guzzler throughout the cold war, not only giving freebees to its government employees but also trying to catch up with Turkish arms purchases. The Turks were trying to get strong enough against their neighbors on the east, namely Soviet Union; while the Greeks were scared that the Turks would attack them. The Turks were buying their arms from the US and Germany, while the Greeks were making payments to the French arms manufacturers, subsidizing them more than the French government. Therefore it should be France, rather than Germany that should pick up the bill now. The trouble is that the French government debt is almost 100% of GDP, which itself is also ringing the alarm bells.

Posted by localmichael | Report as abusive

[…] a longshot.The media have begun to pick up on the general dissatisfaction:Reuters argues that the least-bad outcome is for Greece to default, let its creditorstake the hit (and for a clear explanation of why Goldman Sachswould be able to […]

Posted by Let Them Stew In Their Own Greece – – Deep Web News Radio | Report as abusive

Much more needs to be done “If market discipline is ever to be re-established”. Recommending Greece to be allowed to default while western governments are bailing out companies; inflating their debt and charging it back to the people, is as good as saying that the Lehman default has saved capitalism. I’m sorry, I’m no expert, but I find the article shallow to say the least.

Posted by YiannisG | Report as abusive

[…] Why Greece should default (Kemp, Reuters) […]

Posted by Lunchtime Links 2-16 | Skinny News | Report as abusive

[…] Kemp thinks that Greece should default and reschedule. I […]

Posted by Deus Ex Macchiato » Should Greece default? | Report as abusive

In response to Localmichael:

Yes, France needs to pay its fair share…well said, but Germany had to, too. Like I mentioned before, there’s still a debt pertaining to WWII, so this is not a matter of bailing Greece out…is all about justice…

As far as NATO is concerned, I don’t think that things are as innocent as they appear to be. Why do the turks violate our airspace every once so often. Do you know the cost incurring to Greece each time we have to watch our borders??? The European borders? And I think the Americans are right in the middle of this..

Posted by Alex_Pgreece | Report as abusive

[…] “Byłoby to [bankructwo Grecji] w najlepszym interesie całej strefy euro” pisaliśmy parę dni temu i podtrzymujemy tę tezę z całej rozciągłości. Tym bardziej że wsparcia udziela nam ostatnio Reuters który dorzuca parę smakowitych detali greckiego predykamentu […]

Posted by Dlaczego grecki socjał musi paść | FREE-MEDIA.PL | Report as abusive

Greece is one of the largest weapons buyers in the world today, having armed forces that absorb disproportionately large amounts of resources, due to the known problems on the turkish border and the turkish aggression (real or perceived). These weapons are mostly bought from the US, UK, Germany and France, supporting their own economies. So, in a sense, Greece has been bailing out all these countries for very long. Similarly, most greek imports come from the same countries, especially for high-tech products. If Greece is forced to abruptly reduced its spending, these would be among the first to go, causing a severe blow to the economies of the countries involved. Therefore, assisting Greece would be a step towards financial stability and recovery in many richer nations. On the other hand, crippling the greek ability to import would mean that many other coffers would become emptier.

Posted by DimitrisUK | Report as abusive

I think all the bailing-out solution senario will be concerned with the profit.if EU can’t give their hands.the investbank will came out to creat some new tools to help them.and the asian financial crisis is hard to happen again.As it is Euro-zone not the Thailand or some small countries which are quite easier to be attacked by the hot money.if such expectations exists the IB will try their best to get a share of profit from the behavior of helping GReece.

Posted by snowspring | Report as abusive

[…] "Greece should default and reschedule" […]

Posted by Trades 16 February 2010 – Forex Wealth | Report as abusive

[…] interesting op-eds on the issue. Some are calling for Greece to default on its current debt and reschedule payments as a healthy purge. Some explore what it would take […]

Posted by Anyone who lives within their means suffers from a lack of imagination. « My Big Fat Greek Financial Disaster | Report as abusive