Five Myths About the Greek Crisis—Why It Does Not Mean the End of the Euro and Why Austerity Is Not the Answer

by John Quiggin

The Daily Beast
November 11, 2011

Greece is not the disaster all the naysayers proclaim. Nor does it hearken the end of the euro. And austerity will not solve the problem argues John Quiggin.

After the drama of the on-again, off-again referendum, and the formation of a new national government, attention in the ongoing European debt crisis has turned from Greece to Italy, where the downfall of Silvio Berlusconi appears imminent. This shift of attention is unsurprising but unfortunate, since we are in danger of learning the wrong lessons from the Greek crisis.

Here are five myths about the Greek crisis that must be dispatched if the broader debt crisis affecting both Europe and the United States is ever to be resolved.

MYTH 1: Greece cannot solve its problems without a formal default

A decade ago, this would have been a distinction without a difference. Creditors only accept a voluntary haircut if the alternative is an involuntary one. But with the explosion of markets in credit default swaps, tens of billions of dollars can turn on the difference between an explicit default, which triggers payments on these swaps, and a voluntary restructuring, which does not. In theory, CDS markets are supposed to spread the risk associated with defaults, and thereby make financial markets operate more smoothly.

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