Basic HTML Version
Simply put, Greece defaulted, but the markets
were not affected. There was no contagion, no
panic, no bank collapses, because this outcome
was anticipated.
“It was the dog that didn’t bark”, quips Jacob Funk
Kirkegaard, a Research Fellow at the Peterson
Institute for International Economics.
“For the often maligned Euro zone crisis strategy
of ‘kicking the can down the road’”, he wrote in a
recent article,
1
“the events were an extraordinary
vindication and success because nobody cared
when Greece finally did default. Of course, we
don’t know what the counterfactual would have
been if Greece had defaulted in May 2010 or July
2011 – if banks might have failed or if markets
might have frozen. As a result, Euro zone leaders
will undoubtedly be subject to an iron law of poli-
tics: you never get any credit for avoiding a worse
scenario. Meanwhile, many analysts can now feel
vindicated by correctly predicting an eventual
Greek default early on.”
What will happen, though, from now on? How
foolproof is the new package? Can we be sure
that fears for a new default are exaggerated?
This time, the concern is about the new long-term
government bonds that were “thrust” upon
Greece's private creditors through the bond
swap. They started trading at yields of more than
20%. In an extremely shallow market, these
yields indicate that markets expect a second
Greek default.
“The question, however,” says Mr. Kirkegaard “is
whether this is a foregone conclusion, even if
Greece requires additional Eurozone funding”.
In case Greece “defaults” again, asking more
money from European taxpayers, why should
Europe impose a new PSI scheme? Coupon pay-
ments on the new bonds are no more than 2%
until 2015; therefore any cash savings from a
possible default during the next three years would
be relatively small.
Such a default would also undoubtedly result in
further losses for Europe's banking system,
Trade with Greece
36
1
. Jacob Funk Kirkegaard, “Greece’s new bonds: Is another default coming?”, March 21, 2012, available at http://www.voxeu.org/.