Greece Should Default Now

An orderly restructuring now is preferable to a chaotic one later.

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By Bearemy Glaser | 09-18-11 | 06:00 AM | E-mail Article

European sovereign debt fears are nothing new. We've been talking about Greece's problems for well more than a year now, and we've seen any number of plans attempting solve the crisis from any number of groups. None of these plans has worked. It is becoming increasingly clear that Europe needs to accept that Greece is bankrupt and that a default will be necessary. Indeed, this will be a painful process. However, it could help remove the incredible uncertainty that is rocking the markets and help put Europe back on the path to growth.

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Bearish markets editor Bearemy Glaser is the worry-prone alter-ego of markets editor Jeremy Glaser. Each week, Bearemy will share what's topping his list of concerns and invites you to reply or add your own in the comments section below.

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Greece is InsolventWith debt standing at 143% of gross domestic product at the end of 2010 (and that number has gone nowhere but up given the country's budget deficit), Greece will never be able to pay back its creditors 100 cents on the euro. The only way that the country can become solvent is to cut a huge amount of spending, for growth to pick up considerably, or for the government to find a way to meaningfully raise revenue.

None of those seems likely. As we're discovering in the United States, cutting spending is incredibly tricky. Greek citizens are already revolting against the proposed cuts, which won't even fully close the budget gap for years. Any deeper cuts would likely mean the collapse of the government, and any new regime won't find the task of cutting spending any easier.

On the growth front, Greece doesn't have a particularly competitive economy, and much of the growth depends on government spending and subsidies. As these payments decrease, growth is likely to contract event further. With economic woes spreading across much of the world, the chance that expanding GDP will save Greece is approaching zero.

Adding revenue might be even harder. Tax evasion is rampant across the country, and there isn't much appetite to pay even more in taxes in order for banks to get bailed out. Passing new taxes is therefore unlikely to have a major impact because many of them might go unpaid. Changing the culture of compliance is not something that is going to happen overnight. Novel ideas such as adding a tax to property owner's electric bills and other fees might help somewhat but can only do so much.

Plans to sell off publically owned companies and other assets to raise funds have faltered, as well. Foreign firms don't want to deal with the minefield of labor and political issues that would come with acquiring one of these firms. Add in the negative outlook for Greek economic growth, and there just won't be that many takers even if big discounts are offered.

The only way to stave off the default then is for the rest of the European Union to pour bailout funds into the country. However, these structural problems are not going to be solved by some short-term cash that will need to be paid back at reasonably high interest rates. Kicking the can down the road doesn't do anyone any favors. The uncertainty surrounding Greece is a big problem. Without any clear indication of when the crisis is going to be over, investors are going to be very jittery every time a bad piece of news comes out.

It's better to rip off the proverbial Band-Aid now. Greece will take its lumps, but it will then be able to begin the long process of reconstruction and rebuilding of the economy. In default, the country can make the structural changes it needs to for long-term stability.