Thursday, July 7, 2011

The Case for Kicking the Can in Greece

. Thursday, July 7, 2011

It's been my operating assumption for quite some time that this was the intended endgame:

In other words, new net lending to Greece, from the EU, IMF and/or EFSF to finance the current deficit, is just pushing down the eventual recovery rate on all debt. The marginal rate of writedown on new credit extended to Greece is one hundred per cent. ...

The Greek government should be trying to borrow as much as anyone will lend them, since the repayment terms don’t matter if you’re planning to default. It is analogous to the practice of “trading while insolvent” for a company; this is an illegal thing to do for a corporation, but countries aren’t corporations.

With that in mind, we realise we are under no time constraint at all, and we can organise the eventual bailout at our leisure and for our political convenience. Particularly, we can stick it out past 2013, by which time the German Presidential elections will be out of the way, and a raft of new European legislation will be in place with respect to sovereign and bank debt restructuring, allowing the whole business to be carried out on a more civilised basis.

There's much more here about how the situation can be resolved in a relatively painless way. The conclusion:

The idea is so simple (as JK Galbraith said about the creation of money in a fractional reserve banking system) that it repels the mind. To repeat – all we need is the existing Euro, the existing EFSF, and a legal opinion that this would not constitute monetisation of the Greek national debt, which as far as I can see it wouldn’t. But there is no rush.


The Case for Kicking the Can in Greece




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