Thursday, November 3, 2011

What if Greece Just Says No?

I've been trying to figure out what happens if Greece simply defaults.

It's easy to dismiss the cries of protest emanating from the Greek populace about the terms imposed by the European leaders as part of a bailout package.

After all, the thinking goes, the Greeks lived well beyond their means for many years. Borrowing levels soared, and a corrupt and in-bred government did little if anything to improve basic government functions like tax collections.

And yet, the terms of last week's deal are incredibly draconian. Greece is expected to accept austerity measures for the next 10 years. Unemployment will soar, probably in excess of 20%, for years to come. Public services will be cut and the standard of living of most Greeks will deteriorate further.

All this so the big European banks can be repaid for loans that never should have been made to begin with.

I'm not defending Greece - they could have stopped this train wreck long ago - but I am also questioning whether the medicine is more than most populations would reasonably be expected to take.

A number of commentators have begun to say maybe Greece should just default. Yes, the near term consequences could be dire, but longer term the country could wind up ahead.

Iceland, for example, told its bank creditors to take a hike back in 2008 when it was in the middle of its own credit crisis. As Bloomberg news wrote earlier this year:

Unlike other nations, including the U.S. and Ireland, which injected billions of dollars of capital into their financial institutions to keep them afloat, Iceland placed its largest lenders in receivership. It chose not to protect creditors of the country's banks, whose assets had ballooned to $209 billion, 11 times gross domestic product.

And where is Iceland today? Quoting Bloomberg:

In the beginning, banks and other financial institutions in Europe were telling us 'Never again will we lend to you' {one Iceland official} said. "Then it was 10 years, then 5. Now they say they might soon ready to lend again"

The political winds are considerably different than 2008, when the world was told that we were facing financial Armageddon if the banks were not bailed out.

At this point I think the risks are much greater for French and German banks - and I think that Greek Prime Minister Papandreou had figured this out long ago.