Tuesday, May 29, 2012

The fiscal economics of a Greek exit

by Daniel Gros


May 29, 2012

If Greece leaves the Eurozone, many expect that it that will be forced to default. This column argues that need not be the case.

How much would Greece’s creditors lose if the country were to exit the Eurozone?
  • It is widely assumed that an exit would be followed by a default because the new currency would depreciate so massively that debt service in euros would be impossible.
This assumption is wrong.
  • Most of Greece’s debt is foreign debt and must thus ultimately be serviced through higher exports or import compression.
An exit followed by a massive depreciation of the new drachma should accelerate export growth and provoke a further fall in imports, thus increasing the capacity of the country to service its foreign debt. After a decade of adjustment, Greece might be able to pay its debts.


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