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Saturday, February 4, 2012

On the alternative strategy of a default

In today's commentary, Nick Malkoutzis of the Ekathimerini argues that a default might be an attractive alternative for Greece. Below is my response as to why he is right.

I would suggest that the strategy of “allowing default to happen because, despite all efforts on the part of Greece, it could not be avoided” (as opposed to threatening with default) is the only way to go. It could work very well for Greece, indeed, provided that Greece has arranged for adequate “collateral measures” and has in place an economic plan where to go from here.

Let’s remember why a default is such a feared word for a country: it totally destroys the country’s creditworthiness and blocks its access to capital markets, sometimes for years. Greece has already paid that price! In the case of Greece, a default would have one great benefit: that unfortunate idea of a haircut would not take effect (the price of a haircut would be paid for by generations to come!).

Where I disagree is that “Athens should play hardball”, i. e. provoke default. Since default happens in and by itself, there is no need to provoke it and the price for provoking default would be high. For once, Greece would be smart to assume the role of the victim…

The most critical aspect is that the moment default looks unavoidable, all bank deposits must be frozen (with only minimal withdrawals for personal needs). That needs to be managed with great care to avoid popular unrest (once people understand that they don’t lose their deposits or interest thereon, things quiet down).

The advantage of a deposit freeze is that one finally gets everyone’s attention! At that point, the crisis has arrived even in the minds of those who have so far not been affected by it. That is the point where the government either has a plan and commitment for Greece’s future, or not.

If not, Greece’s slide along the path towards disaster will be accelerated by a default.

1 comment:

  1. How about announcing a bank holiday over the weekend to run for two weeks - and then lifting it after two days. That might grab attention and bring people - above European leaders - to their senses.

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