My friend and writing colleague George Irvin makes a simple but highly effective point. Greece still has a choice. It could abandon the euro and default on the bulk of its debt. After all, it worked for Argentina when it defaulted in 2001-02.
What is more it would nip contagion in the bud.
While I agree that Greece can indeed default, in fact I\’d agree that it should and even go as far as to say that it almost certainly will at some point, the idea that this will nip contagion in the bud is laughable.
Let\’s look at two scenarios. Investors (people, banks, insurance companies, pension funds, whatever) have Euro somelargenumberofsquillions lent to various eurozone governments. Those same eurozone governments also want to borrow euro notquiteaslargeanumberofsquillions in coming years.
1) Everyone scrambles together to make sure that those investors get back the money they have already lent in some manner.
2) One of those eurozone governments sticks up the middle finger to those investors and says \”You\’ll not get your money back from us\”.
Which of these scenarios is more likely to have said investors running for the doors on the loans they\’ve already made and refusing to make the potential ones in the future?
Which will increase the contagion?
Option 2, clearly.
Especially since the general feeling is that the eurozone itself won\’t let a sovereign borrower default: if it becomes obvious that they will then the pressure on those currently thought of as possible but not likely defaulters becomes greater….they have become more likely defaulters as that restraint against default provided by that view of the eurozone has been lifted.
Now I\’ve already said that I think default is not just likely but near certain. But you don\’t always start from where you\’d like to be. However, the idea that contagion, financial panic, will be reduced by such a eurozone sovereign default is laughable. It\’ll be triggered by it as there are those out there who really do believe that the eurozone won\’t allow such a sovereign default.