March 28, 2011
There's been a bit of discussion floating around about whether the US's deficit and debt situation makes it appropriate to draw comparisons with Greece. Of course, such a comparison is ridiculous for a number of reasons, not least because the US has its own currency. But Greece has been on my mind lately for unrelated reasons, including the following news:
Euro economists expect Greek default, BBC survey finds
Greece is likely to default on its sovereign debt, according to the majority of respondents to a BBC World Service survey of European economists. Two-thirds of the 52 respondents forecast a default, but most said the euro would survive in its current form.
...The forecasters the BBC surveyed are experts on the euro area - they are surveyed every three months by the European Central Bank (ECB) - and as well placed as anyone to peer into a rather murky crystal ball and say how they think the crisis might play out. The survey had a total of 38 replies and two messages came across very strongly.
Not only do I agree that default by Greece on its sovereign debt is quite possible... but I think it increasingly likely that policy-makers in Greece may decide that it is the least bad option at this point, particularly in the face of an increasingly hard-line attitude from Germany regarding bailouts (which will only be reinforced by recent election results).
The problem is easy to lay out: Greece has more debt than it can realistically make payments on, and being a euro country also has a currency over which it has no control. If it had its own currency, it would be in a classic debt crisis similar to several Latin American countries in the 1980s, or possibly Mexico in 1994.