Anybody Wish Greece Would Just Default?

[moda0306]

Escafandro, if Greece just defaults and stays in the Euro and does not get fiscal union with Germany then it will just default again and again and again IMO.

Why would that be?  Further increased interest rates?  Poor governance in general?

Just curious.

[stone]

moda, if Greece defaults and stays in the Euro, then they will only be able to borrow at very high rates. The only way they could carry on would be by a dramatic deflation, cutting wages and prices. That is extremely hard to orchestrate. A devaluation by contrast acts evenly and instantly across the whole economy. It has been compared to the idea of going to daylight saver time between summer and winter. In principle everyone could not change the clocks and instead could go to work an hour later, the TV schedules could change by an hour etc etc. BUT it is much easier to just change the clocks. Devaluing is like changing the clocks.

[stone]

moda, perhaps most importantly, internal Greek commercial debts would have to take a haircut. Mortgages, car loans, credit card debt etc etc would all become unafordable if prices and wages were deflated. By contrast a devaluation cuts all those debts in proportion to the cut in prices and wages (of course no "nominal cut" just a real cut relative to an external setting such as USD, gold or oil).

[Storm]

The more likely scenario in a default is that Greece just goes back to the Drachma and exits the Euro.  That way, their currency would be almost worthless to the rest of the world, so imports would be expensive, but they would be able to export at a great exchange rate and rebuild their economy.

I read that it would only cost about $300 billion to completely bailout Greece.  So, even though this is a large sum of money, it's not that much compared to the grand scheme of things.  I think the ECB could easily do this, if it had the political will.  The elephant in the room, however, seems to be Italy.  Italy has something like $1.4 trillion in debt, so if Greece gets bailed out, you know Italy will be asking for a handout next...

The ECB is sort of like the lunch lady at the school cafeteria - if she lets the one poor kid have his lunch for free, all the other kids won't want to pay either....

[moda0306]

I heard the process of "pulling out" would be very painful due to the fact that all the contracts in Greece and between them and their neighbors are in Euros.

I was too young to understand it at the time, but did the transition to the Euro shed any light on what a transition back to a national currency would involve?  Overnight re-statement of contracts in a different currency?

[craigr]

I heard the process of "pulling out" would be very painful due to the fact that all the contracts in Greece and between them and their neighbors are in Euros.

I was too young to understand it at the time, but did the transition to the Euro shed any light on what a transition back to a national currency would involve?  Overnight re-statement of contracts in a different currency?

There will be many problems from the fallout. But the end result will be better because all of those countries should not be married to each other with a single currency and government. It was always a bad idea and was bound to fail. I hope it ends soon so those countries can regain their sovereignty and start running their own affairs again independent of the others.