Tuesday, March 23, 2010

Greece Should Opt for Partial Default

“With each passing day, it becomes more apparent that a restructuring of Greek debt is unavoidable. Some form of default will almost surely be forced upon Greece, and this may be the most preferable alternative” write Simon Johnson and Peter Boone in Project Syndicate .


“If Greece is to start paying just the interest on its debt – rather than rolling it into new loans – by 2011 the government would need to run a primary budget surplus (i.e., excluding interest payments) of nearly 10% of GDP. This would require roughly another 14% of GDP in spending cuts and revenue measures, ranking it among the largest fiscal adjustments ever attempted.

Worse still, these large interest payments will mostly be going to Germany and France, thus further removing income from the Greek economy. If Greece is ever to repay some of this debt, it will need a drastic austerity program lasting decades. Such a program would cause Greek GDP to fall far more than Ireland’s sharp decline to date. Moreover, Greek public workers should expect massive pay cuts, which, in Greece’s poisonous political climate is a sure route to dangerous levels of civil strife and violence.”

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