Wall Street Journal
March 1, 2011
Does Europe need a default? As euro-zone leaders work to defuse the dangerous debt crisis that is raging at their periphery, more and more observers seem to believe that part of the solution should be a major cut in the face-value of outstanding Greek and possibly Irish government bonds.
At first glance, the case for a stiff haircut is easy to make: The current strategy of buying time has not put an end to the debt crisis; contagion risks from a forced debt-restructuring have diminished as markets have gotten used to the idea that public debts may not be repaid in full; and some countries are said to be bust anyway. So the argument goes that the sooner the issue of public debt is resolved, the sooner markets and policy makers can move on to other issues. Advocates of a haircut also point out that debt restructuring has been part of the solution in many previous emerging-market debt crises, and it is thus a tried and tested procedure.
But any default constitutes a serious breach of contract and trust, and should always be a very last resort. For the time being, the case against a forced restructuring of peripheral European debt remains strong.
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