by Simon Nixon
Wall Street Journal
June 21, 2011
As the Greek turmoil swirls, some commonly held beliefs are worth debunking:
1. Greece is insolvent.
No, it isn't. As economists Carmen Reinhart and Kenneth Rogoff have noted, sovereign defaults are typically about willingness to pay rather than ability to pay. Greece has plenty of assets and huge potential to cut spending, increase tax collection and improve productivity if it is willing to make sacrifices. Rather than solvency, Greece's challenge is whether the changes required are politically possible.
2. It is in Greece's interest to default.
Hardly. The country is still running a large primary deficit, so even if it inflicted 50% "haircuts" on bondholders, it would still need to borrow money immediately or face huge spending cuts overnight to balance the books. Worse, the Greek banking system would collapse as its capital was wiped out and its funding dried up; under European Central Bank rules, Greek government bonds would no longer be eligible as collateral. Nor would it make life easier if Greece tried to leave the euro, since this would likely trigger an immediate run on its banks.
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