Monday, 27 June 2011
What is worse: Greek Default or EU management?
The choice facing the Greeks is a default on its debts or the bitter medicine of accepting a European Bailout of e100 billion, with some horribly stringent requirements.
However, as bad as these are (massive sell off of virtually all state owned assets, tax rises and social benefits reduced), we should consider the default scenario.
Argentina is the best comparator, as it came of its dollar peg - but even Argentina did not have to print an emergency currency overnight as Greece would have to do. Nor did it in the end default on a large amount of its debt. Yet over the next 3 years the Argentinian peso lost 80% of its real value. That is quite a haircut - Greece, if falling our of the euro altogether, could do worse.
As bas the the Eu bailout is, those on the streets of Athens saying 'let's default' have perhaps not thought through its costs. Imagine the price of a computer going from £400 to £1600 in a short period - too much for many businesses to cope with.
Argentina had at least a decent export market of grains and soft commodities to help bring in foreign cash - Greece has some but nothing like so much.
Instead, my vision of a bankrupt Greece is that state assets get sold anyway, only now the wealthy shipping owners, money safely in dollars in London banks, come back to their home country as 'saviours'; picking it up for a few drachma along the way.