What Next for Greece and for Europe?

by Peter Boone & Simon Johnson

New York Times
September 15, 2011

Uncertainty about potential loan losses in Europe continues to roil markets around the world. For many investors, taxpayers and ordinary people there is no clarity on the exact current situation — let alone a consensus on what could happen next.
The news on Wednesday was relatively good, but the situation remains precarious.

What should any friends of Europe — the United States, the Group of 20, the International Monetary Fund, perhaps even China — strongly suggest the Europeans do?

A good start would involve being honest on four points. There is nothing pleasant about the truth in such crisis situations, but denial is increasingly dangerous to all involved.

Greece is on the front burner. Currently on offer is a debt swap for private-sector lenders that, once it goes through, will effectively guarantee 33 cents for every euro in bonds that they currently hold. That downside protection is attractive to banks — because they will get hard collateral in the restructured deal. (Greece would buy the bonds of safe European countries, like Germany, and hold them where creditors could get at them.)

The first brutal truth is that this is a default by Greece, and all attempts to deny this or use another word just muddy the waters.

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