Thursday, May 6, 2010

What will happen if Greece defaults? Insights from theory and reality

My piece (with Eduardo Borensztein) on the costs of default: here
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1 comment:

M.G. in Progress said...

I think that there is an important point to be stressed. We are not actually bailing out Greece but those banks which invested in Greek sovereign debt under a faulty assumption that there are "too safe to fail" assets (default is implicitly excluded although a higher interest rate should also pay for that risk). Doing so we continue the Ponzi scheme.
If the cost of a default is not that high, particularly for Greece, it's worth considering it and start anew. I do not think that the fact that the country cannot depreciate it's currency should be construed as a good and sufficient reason to avoid the default. If we just let Greece orderly default than start issuing EU bonds and tax financial transactions (including bonds speculation) we can "easily" compensate any austerity plan and borrowing cost for Greece.