Greece Will Default On It's Debts, Renewing The European Debt Crisis

[No DUplicitous DUpe]

Greece Will Default On It's Debts, Renewing The European Debt Crisis
(posted with permission from: http://sane-ramblings.blogspot.com/2011/05/greece-will-default-on-its-debts.html)

Each time the European Central Bank and the International Monetary Fund tell investors the crisis is over, they are proven wrong. Greece, Ireland and Portugal are deeply in debt and the bailout each of them received is onerous and will eventually force them each to default.

The terms demand high interest rates and a stiff payment structure that their peoples can't afford. It is a little like the reparation payments the allies forced on Germany after World War l. It brought huge hardship to the German people as their government inflated their currency to pay what they owed. You may have seen old pictures of a wheelbarrow full of currency that it took to buy a loaf of bread.

Today, Greece is desperately trying to avoid a default but I estimate that their lenders will have to write-off at least 50% of their funding. But after all, these bailouts were really about protecting the banks who so foolishly loaned enormous sums of money seeking high rates of return before the 2008 global financial collapse. Now, like the peoples of Greece, Ireland and Portugal, they must share in the pain.

It is the humanitarian thing to do. The price to be paid for foolish banking risks should not rest only on the shoulders of retirees, teachers, shopkeepers, nurses and other working people in those nations. Nor should their children and grandchildren sacrifice their educations and the security of their homes to compensate the bankers and their shareholders.

To learn more, please see "Greek Woes Fuel Fresh Fears," The Wall Street Journal, 5/10/11
http://online.wsj.com/article/SB10001424052748703864204576312883521075492.html

[On the Road]

1. They're Going to Have to Drop the Euro

and go back to the drachma, which will inevitably trade at a lower exchange rate. If they can do that and stay within the EU, that will help them reignite the economy. They're going to have to raise their top tax rate as well.

The bond default is a big problem for all other countries including the US. It will make future borrowing much more expensive.

[No DUplicitous DUpe]

3. The author agrees...

He says, "Regarding Greece defaulting on its debt, the poster is right. Eventually they will be forced out of the EU and be back to using drachmas instead of Euros. But the important point is the Euro nations can’t stem the financial collapse of Greece and then Ireland and Portugal, with Spain (a huge economy) and Italy to follow. Given the magnitude of the U.S. debt problems and now much of Europe to come under financial siege unless Germany underwrites them, we have tough times coming."

[reggie the dog]

5. this will not make the EU confederation fall apart

the Euro zone may well get smaller but there is no reason to kick Greece out of the European Union. You do not have to use the Euro to be part of the EU. the UK and Denmark are 2 countries that could use the euro but chose not to.

[WatsonT]

2. This very well could be the first step in the dissolution of the EU

they might reduce it back to some key players: Germany of course, France maybe, and the scandanavian states and rebuild from there.

[coalition_unwilling]

4. Whatever happened to the idea that lenders lend at their own risk? I

fail to see why people and institutions that lent to the Greeks should not have to take "a haircut." No one forced those lenders to lend money to Greece on the terms on which they did. One of the risks in lending is the threat that a borrower may default and immunizing these lenders against such a default seems to me to create a far greater moral hazard than Greece's default ever could.

Could someone please explain to me why it is in the international working class' interest that Greece not default?

[socialist_n_TN]

6. Yeah, I'm curious about this myself.........

I see where it would hurt the international capitalists, but the working class? I'm not sure it would apply. So somebody educate me.

[coalition_unwilling]

7. I suppose one could make the argument that it is in Greece's

self interest(and, by extension, its working class) not to default if it wishes to secure future financing. However, Argentina defaulted about 10 years ago, IIRC, and lenders today line up at the door to lend to it.

But I fail to see the harm to the working class in Greece or anywhere else should Greece defualt on this debt.

[badtoworse]

9. It's tough to manage cash flow without credit

There may be times when the government lacks cash to pay salaries and pensions. I doubt the working class would like that.

[badtoworse]

8. If Greece defaults, the lenders will take a haircut,...

...but they will not lend to Greece anymore. It's unlikely that foreign suppliers would sell to Greece on credit. Given its problems collecting taxes, the government might frequently find itself with no cash - how would they pay people?

Being shut out of the credit markets sucks just as much for countries as it does for people.

[coalition_unwilling]

10. Well, that's the threat made subtly and no-so-subtly to Greece, i.e.,

default and you'll never borrow again. I'm not an expert on this topic by any means, but I seem to remember a similar dynamic at play with Argentina some 10 years ago. From what I've read and learned, Argentina defaulted on its debt, BUT the world did not end, and today lenders line up at the door to lend to Argentina.

Totally understand your point about the need to access credit facilities for short-term operational expenses. Presumably, Greece would still be able to access the commercial paper markets, even should they default on their bonds. Again, though, I'm certainly no expert and will defer to anyone with expertise on the subject.