Editorial
April 20, 2011
For nearly a year, Europe's official refusal to acknowledge even the possibility of a Greek debt default has bordered on the comical. But with Greek two-year bonds yielding 20% and credit-default swaps priced as if a default is more likely than not, EU denial has gone from amusing to dangerous.
Media reports this week have cited Greek, German, EU and IMF officials anonymously admitting the obvious: Even if Greece meets the targets agreed in its bailout package, it will be saddled with a debt burden that is unsustainable, which makes a restructuring of those debts, now approaching 150% of GDP, inevitable. All these reports have so far been met with strenuous denials from spokesmen and other officials.
Behind these official denials lies a more sophisticated narrative that says a default or restructuring would hurt so many institutions that might need their own bailouts that relieving Greece of some of its burden will do more harm than good. According to this argument, it would be better for Greece to continue to muddle through for now on EU and IMF life support than to expose creditors, including Greek and other European banks, to potential losses on Greek debt. We could add a third argument, which is that openly discussing debt restructuring might make it inevitable, leading to capital flight.
None of this is persuasive. With debt yields on Greek bonds at record highs, the market has already priced in the likelihood that Athens will never make good on its obligations on time and in full. At this stage, it makes more sense to inform taxpayers, investors and governments about where the exposure and risks lie, which is why it's vital that Europe's current stress tests look carefully at sovereign-default scenarios. If Greece must restructure its debt—and that seems very likely—better that it do so in an orderly fashion than to wait until its hand is forced.
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