September 1, 2010
Debt default by an advanced economy such as Greece is “unnecessary, undesirable and unlikely”, according to a report released on Wednesday by the International Monetary Fund.
That contradicts the market consensus that Greece will eventually restructure its debts.
“Markets are overestimating the risk of default,” said Paulo Mauro, one of the authors of the IMF paper.
Once Greece has cut its deficit to zero, it will not need any new borrowing to finance its budget. Many investors believe that, once Greece no longer needs them, it will try to cut its existing debts.
But the IMF authors say that in the eight cases during the past 20 years when an advanced economy with high government debts cut its deficit to zero, none of went on to default.
Examples include Belgium in 1984, Portugal in 1986 and Italy in 1991.
“Once countries have endured the pain of adjustment, they go to great lengths to avoid the pain of default,” said Mr Mauro.
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