Dear Greece, Why Not Just Default?

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Yiorgos Karahalis / Reuters

The Greek government survived its no confidence vote in parliament, and the world is breathing a mini sigh of relief. So where does that leave the Greeks, and what are the next best steps?

According to Greek politicians, the name of the game is bailouts, and Greece is desperate for another one. To get that squared away, its parliament first has to pass another round of painful budget cuts, which would free up the next payment of its last EU/IMF bailout, allowing it to make the next round of debt payments due in mid-July. But as the Greek debt crisis 2.0 continues to unfold, there’s more and more head scratching (especially by the Greek people) about exactly where this is all going.

After a year of drastic budget cuts and bailout money to grease the wheels, Greece is no better off. And by most calculations, there is no way that continuing to tread down the same path will put Athens back in the black. That’s why, as Michael Schuman pointed out this week, another Greek bailout is just plain dumb. More bailouts don’t increase the likelihood that Greece will be able to eventually pay down its debts, and at this point, private creditors won’t touch Greek debt with a ten foot pole. Plus, the drastic austerity measures tied to the bailouts are sure to drive economic growth into the ground, which would eventually result in an even more painful default. All those factors lead to one conclusion: Greece is already insolvent.

And yet, European officials continue to crack the whip as if that isn’t the case.  Ahead of next week’s budget vote, president of the European Commission José Manuel Barroso warned Greek parliamentarians that, “If anyone thinks that without the program agreed with the E.U. and the I.M.F. we can still get by somehow, there’s an alternative program, that’s not true. There is no alternative. The E.U. and the I.M.F. won’t support any other program.”

But is that really true? While none of the options are pretty, they don’t all include bowing to the IMF. The AEI’s Desmond Lachman, among others, thinks it’s high time for Greece to opt for exiting the euro and unshackling itself from both the EU and IMF.

Attempting to hew the International Monetary Fund policy line of no default and no devaluation will almost certainly exacerbate Greece’s already very deep recession. And, by so doing, it will create those economic and political conditions that in the end will make it impossible for Greece to repay its debt and to remain within the euro.

By kowtowing to its lenders and scrambling for more bailouts, Greek politicians are only making life for the Greek people worse. As Alan Cibils explains in the New York Times, the same thing happened in Argentina in the run up to its default in 2001. A deep recession in the late 90s, coupled with rising debt, forced Argentina to turn to the IMF for funding. The severe spending cuts the IMF required drove the Argentine recession into the ground, rendering the country incapable of paying down its debts. All the while, Argentina’s peso was pegged to the U.S. dollar, similar to Greece’s tie to the euro today. The flourish of bad policies eventually led to Argentina’s default, the biggest in history. But what happened after? It wasn’t the horror story you might imagine. Within a year, Argentina had devalued its currency, and the economy started growing and didn’t stop. Cibils:

Default can be a solution, since it can end an unsustainable situation, frees up fiscal resources for more productive use and eliminates the need for access to the bond markets…regaining control of the national currency and the ability to conduct independent monetary and fiscal policies are essential for economic recovery.

So why aren’t Greek politicians clamoring for a default? First there’s the fear of contagion, which has the French and German banks, Greece’s biggest private creditors, twisting the Greek government’s arm to keep the bailouts coming. But according to this chart out by Barclays Capital, public institutions — not the private sector — now hold the majority of Greece’s debt. That makes the possibility of Greece’s crisis spreading throughout the financial system seem less likely. Even if a run on Greek banks resulted from default, recapitalizing them would cost a lot less than the endless rounds of bailouts needed to backstop the entire country. Greece’s six most exposed banks hold a mere €30 billion of Greek debt between them.

The other fear (and perhaps the more potent) is that the ensuing chaos of a default would cost Greek politicians their jobs. But Papandreou already offered to leave his post if it strengthened Greece’s resolve, and more politicians are bound to flee once the pains of new austerity measures actually set in.

And at this point, the Greek people seem willing to put up with any government that would scrap the IMF. A poll taken the day before Papandreou’s confidence vote showed most people (55%) preferred that the government live out its four-year term, set to end in late 2013, rather than call a snap election. And 80% of respondents to a poll by MRB for the paper Realnews said they would rather ditch the EU and IMF’s austerity plan — which offers no routes to job creation or growth — than get more of its aid.

Default wouldn’t be pretty. But in the long run, sticking with the IMF and EU is looking even worse.

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