Six reasons why Greece should default

by Michael Schuman

Time
September 23, 2011

As global stocks tank over rising fears of a double-dip recession, one country at the center of the storm has never exited the recession – Greece. Amid its increasingly severe debt crisis, the Greek economy is in its third consecutive year of contraction, and, under pressure to slash state spending and stabilize its national debt, there is little hope that the situation will turn around any time soon. The IMF doesn't expect positive annual growth in the country until 2013! Earlier this week, the government approved yet another package of austerity measures, including cuts to pensions and public sector workers and a program to tax the poor. The measures are an attempt to appease Greece's creditors in the euro zone, who are demanding even harsher steps in return for continuing a $150 billion bailout given to Athens last year. Without those rescue funds, Greece could default on its debt.

That default is something Europe has been struggling to avoid for a good 18 months. But more and more, I'm coming to believe Greece should default. Here's why:

The prevailing wisdom concerning Greece is that a default on its $400 billion of sovereign debt would be a catastrophe for the world's financial markets and help speed the global economy towards a renewed recession. We can't rule out that possibility. European banks are already under pressure (watch for more on that in this space), and losses inflicted by a Greek default, though unlikely to topple European banks, could heighten concerns about the health of Europe's financial sector, sending global markets into turmoil, worsening the euro debt crisis, and leading to something truly ugly. That would especially be the case if panicky investors fled the bonds of other indebted euro zone countries, like Italy and Spain, possibly causing the collapse of the monetary union. None of this is certain, of course, but we can't predict how the global economy would react to a Greek default, especially with sentiment already so weak. The general thinking is: Why take the risk? Keep bailing out Greece.

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