Tuesday, December 25, 2012

Greece Will Default, Again

Ashoka Mody, a visiting professor of International Economic Policy at the Woodrow Wilson School of Public and International Affairs, Princeton University, has very clearly summarized the continued predicament of the Greek economy in a recent Project Syndicate post, here.


… “the very premise of the current deal and the expectations it sets out are wrong. First, the notion that there is a smooth transition path for the debt/GDP ratio from 200% (current) to 124% (in 2020) is fanciful. Second, even if, by some miracle, Greece did reach the 124% mark by 2020, the claim that its debt will be “sustainable” is absurd.”

For the moment the German government is willing to continue to finance Athens, as Nouriel Roubini notes, because as long as Spain and Italy remain vulnerable, a Greek blowup and/or euro exit could spark contagion of interest risk premiums and defaults in the Eurozone south before the German election of September 2013, jeopardizing Ms. Merkel chances of winning another term.

But assuming that the Greek unsustainable mid-term financial pseudo equilibrium can survive until next fall, despite a forecast of – 6% of real GDP growth this year and – 4% in 2013 (according to the IMF which has been repeatedly over optimistic in its past projections), the end of next year will be a time of reckoning.

The question is: wouldn’t an exit of Germany (and possibly of some other northern countries) from the euro be more advantageous for all the European economies than an exit of a heavily indebted southern country whose debt in euros would be magnified (in its own currency, thus relatively to its tax receipts and GDP) by the inevitable large depreciation of this newly recreated national currency, leading to a severe bankruptcy that could also jeopardize its creditors and start a contagious process in the South?

As I claimed in several past posts, Germany is the key.

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