Financial Times
September 22, 2011
Even though the Greek parliament has given the government some breathing space with its vote of confidence late on Tuesday, a default by Greece is inevitable. With a debt to gross domestic product ratio of more than 150 per cent, large annual deficits and interest rates more than 25 per cent, the only question is when the default will occur. The current negotiations are really about postponing the inevitable default.
If Greece were the only insolvent European country, it would be best if its default occurred now. Cutting its debt in half and replacing the existing debt with low interest rate bonds would allow Greece to service its debt without the excruciating pain that would be involved if it tried to service its current debt.
But Greece is not alone in its insolvency and a default by Athens could trigger defaults by Portugal, Ireland and possibly Spain. The resulting losses would destroy large amounts of the capital of banks and other creditors in Germany, France and other countries. There would be a drying up of credit available to businesses throughout Europe and there could be a collapse of major European banks.
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