Fumbling Toward Default

New York Times
Editorial
July 6, 2011

An outright default by Greece on nearly a half-trillion dollars of outstanding debt obligations would be a catastrophe for Greece, for its European creditor banks and for financial institutions everywhere as credit-default swaps on Greek debt worked their way through the derivatives markets. It does not need to happen, but barring an unexpected show of European political and economic leadership, that outcome is becoming increasingly likely.

The latest chapter in the sorry saga was written over the past week. At the insistence of European political leaders, Greece’s governing Socialists voted to apply another dose of growth-killing austerity to the country’s nearly inert economy. Austerity measures in the past have done more harm than good, but threatened with a cutoff of needed European loans, the Socialists saw no other responsible course. (Opposition conservatives ignored European pressures and voted no.)

In return, Europe was supposed to release the next installment of bailout money and come up with a new long-term assistance plan designed to permit Greece to recover and repay. Predictably, the short-term money, urgently needed to keep French and German banks solvent, was easily approved. Long-term relief, urgently needed to keep Greek hopes for recovery alive, was put off until after Europe’s August holiday.

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