I wrote in May last year here that I didn’t see how Greece could avoid a default, or in more polite terms, a restructuring, to get out of its present predicament. A position also held by Martin Feldstein here .
The Economist (January 13, 2011) now states:
“A Greek default would be the first by a rich country since 1948. It would be shocking but feasible. Restructuring by several poorer ones, from Uruguay to Belize, provide a legal case history for how to do it. (…) The lawyers think that Greek restructuring could be completed in six months. It must be done eventually. It could be better not to delay.”
Beyond the legal angle, a Greek default has important consequences for European banks saddled with too much Greek debts, but also for other troubled European economies, and thus for the future of the euro.
If Greece manages to stay in the eurozone after restructuring, further problems can be expected in the near future and the recovery of the Greek economy will remain dubious, requiring more transfers from Germany and France and protracted recessions in the debtor countries.
If Greece exits from the euro without too much disruption, other countries could follow the lead, with an uncertain effect on the value of the euro and thus on the cost of the exit for the latecomers. A fall of the euro would reduce the cost of exit while a rise relative to dollar and yuan would make it higher.
My bet is that, anyway, the return to national currencies will be a competitive process even though a concerted dismantling of the euro would be economically more appropriate.