To promote and encourage the default of a nation is very uncommon and a bold statement about your opinion on such matters. The consequences of such drastic actions would cause a violent macroeconomic catastrophe. But history has shown that a sovereign default is often a revitalizing last resort and for Greece, a country whose fiscal problems are worse than many other nations, it may be in its best interest and for the world to implement an orderly and properly controlled default on its debt. Let's take a look at some reasons to support such extreme proposals.
For the last two years, Greece has taken austerity measures to help reduce its debt and revive a current four-year recession. When Greek's debt crisis became relevant, the nation cut and froze salaries of public and private workers and cut holiday bonuses on government employees. It is also reported that many have not been paid for nearly two years. Most recently, the country increased taxes on incomes, created new taxes on purchases (like GST in Canada), and sold national property and assets to raise revenues. These austerity measures forced a heavy burden on its citizens that made significant sacrifices to save their nation. The final result: an August 2011 report revealed the nation's revenue fell 1.9 billion euro and spending rose 2.7 billion - laughable.
Good money is being thrown at bad money. The European Central Bank (ECB) and the International Monetary Fund (IMF) has aided Greece so long as Greece took necessary financial steps to prove they were working towards fiscal balance, but as mentioned above, these austerity packages have proven unsuccessful. The risk of a default is high and credit default swaps on Greek debt are at record prices. Two-year notes are yielding more than 70 per cent and investors are pricing in a 98 per cent chance of a default. But with worldwide sentiment so bearish, the IMF and ECB continue to fuel a dying fire. Continued talks for loan packages are still in the works. They might believe that current debt restructuring plans will save Greece, but it will only stave the inevitable.
The country has had a long standing history of high debt. Since 2000, the country has never had debt as a percentage of GDP under 97 per cent, with most of those years well above 100 per cent. The nation defaulted four times in the 19th century, so it would not be an unusual circumstance, although in fairness, a different time and setting. There are many possible reasons to blame for the continuous spending problems, but the current mood of world investors is manifested in the phrase, "German taxpayers are funding Greeks to retire at 50."
Greek citizens can retire at 50 with a near-full pension. That is wonderful, but therein lies the problem. The average lifespan in Greece is 80.2 (as of 2009 data), which means that the government is providing an income for about 30 years after retirement. Greece has taken massive steps, but should they consider raising the pension payout to 60 or 65 like most nations? Other nations are already proposing retirement at 71 to keep their government pension programs afloat as the baby boomers start retiring.
There are many around the world who are proponents of a Greek orderly default as well, including a former Argentinian leader who was at the helm of their debt restructuring plan in 2001. Unlike a company default, a sovereign default holds no legal consequences because a country controls its own affairs. A "haircut," as is called, allows a nation to pay back a portion of its debt, with many experts expecting it should be around 35 to 50 per cent, but Greece continues to deny this will happen. Some claim that those who purchased Greek bonds will lose all of their money regardless. By avoiding an orderly default, it is only hurting its neighbours who are forced to fund Greece, regardless of their stance on the issue. It would also remove massive uncertainty in financial markets which have once again become volatile.
A default would also allow Athens to leave the Eurozone and the euro currency and coin a new currency, which gives the country the ability to create money to repay debt obligations, as is similar with most nations, like America. However, this would assure that the euro was a failed experiment and likely why many don't want Greece to fail.
It is a common theme to hear that Greek is nearly insolvent. When I started writing this blog, two-year notes were yielding 26 per cent. That was two days ago! It has nearly tripled, and regardless of what the IMF and ECB decide to do with the debt restructuring plan, one thing is certain: Greek is on the brink of default and things are about to get ugly.
