Why Greece is better off defaulting and knows it

Who is it that wants Greece to sort out its debt crisis by voting through austerity measures this week in its parliament? Not the protestors outside certainly. Not really the Greek public who will have to bare this pain.

It is the rest of the eurozone which will otherwise have a Lehman-style event on its hands, with no way of knowing where the ultimate fall-out will come. German chancellor Angela Merkel as good as said this last week.

Already bankrupt

The nightmare scenario for Greece outlined by European officials is national bankruptcy in the event of a default. But with interest rates at their current levels the country is already bankrupt. There is no way to repay interest at these rates and so the total debt will get bigger and not smaller as money has to be borrowed to pay interest.

For a country to repudiate and default on sovereign debts is hardly something new in world history. There comes a point for any debtor when bankruptcy is not only the best option, it is the only option.

We know how countries cope with bankrupt banks. They nationalize them. Yes such countries immediately go into recession and asset prices fall. But that situation can turnaround quickly as new money flows in to take advantage of bargain tourism and holiday homes, for example.

At the same time a government can use a recession to sort out an excessively large public sector, that it can no longer afford to pay. Those unemployed people then have to do something useful instead or starve. It’s a dynamic catalyst.

Recovery prospects

Perhaps if the Greeks put all the energy they have mustered for protesting into honest enterprise then the rewards might be amazing. Greece does have a marvellous climate, and some very nice infrastructure paid for out of European funds that will stay for free after default.

The loser will be the European Union and the institutions that have bought Greek debt. The latter still believe that ultimately the Greeks will not default. They have miscalculated and a second global financial crisis will follow because the Greeks have a unilateral call and will ultimately not want to pay up.

It is not the same as Lehman because for Lehman bankruptcy really was the end of the road. For a country when you open the curtains the morning after default it is still there, ready to face the day.