Financial Times
February 26, 2012
It was a deal nobody believed in – including those who negotiated it. We are now going to go through the motions but Greece will default, one way or the other. The question is when and how.
Paul Krugman observed in his New York Times blog that Greece was trapped between an austerity programme that forever aggravates the debt problem, and a default that will not be feasible until the country reaches a primary surplus – a budget surplus after payment of interest on debt. This is not expected to happen until 2013. As a result, he wrote, the Greek political establishment would have no choice but to wait and see.
This is right, but it could do more: it could prepare for a total external default next year. That means it would need to persist with austerity this year simply to bring the primary deficit close to zero. And it would also have to enact some structural reforms to reap the benefits a default could bring.
On the heroic assumption that the agreed private sector participation stabilised Greek debt at 120.5 per cent of gross domestic product, as targeted by Tuesday’s agreement, a default would invariably mean “official sector privatisation”. It would have to include the loans by the European Financial Stability Facility and the bonds held by the European Central Bank and various national central banks. Greece might also default on some or most of its remaining private sector bonds. By default I mean a renunciation of most of its foreign, but not necessarily domestic, debt. The goal would be reduce the total debt-to-GDP ratio to 60 per cent.
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