PA ANALYSIS: Greek default is a necessary line in the sand

A Greek default has been called a ‘Lehman moment’ but it may prove to be a new beginning.

2 minutes

Chances are that Greece will eventually receive the payment – and before the 15 July cut-off date –  but there has to be a limit on how long it can continue to receive hand-outs without being forced to make the savage cuts necessary to at least afford to pay back the money it is being loaned.

It cannot even afford to pay back any of the initial €110bn bailout payment.

What this all adds up to is the fact that concerns over Greece are considerably higher, more widespread and far more realistic, for now, than they ever were for Ireland, or Portugal, Italy or Spain. The very real prospect of Greece’s sovereign default may, ultimately, not be a bad thing.

As a reminder, there are still plenty of commentators and analysts who somehow blame the financial crisis on the collapse of Lehman Brothers rather than seeing its collapse as the line in the sand that actually signalled a start to the resolution of the crisis.

Those resolutions may not have all proved to be wise choices, and the panic surrounding the collapse is something no one wants a repeat of. But this panic came about partly as a result of policymakers’ attempts to kick the can down the road and due to the failure of both markets and governments to confront the problems in front of them.

In that context, there are many parallels with Greece’s sovereign default crisis; it is not the first country to find itself in a desperate financial mess but it is the first one that looks like it will actually default at some point soon.

Anyone holding high office within the European Union and Greece has railed against it leaving the euro although the word on the streets – of Crete, at least – is that the locals are fully expecting to use the drachma during next year’s tourist season.

There should be strict limits on what Greece spends before they are able to come back and ask for more. Simply giving Greece the aid package come-what-may would not send a strong enough message that the eurozone wants a resolution to the crisis and a default might be, in the long run, the best thing for them and the rest of Europe. It is a case of weighing up a sharper, and perhaps shorter shock against years of dull pain.

As a footnote, it looks like spending beyond means is not confined to the Greek or even Western experience, according to this comment from the Financial Times (19 June): “After hitting a low last year, Serasa Experian, the Brazilian arm of the credit rating agency, reported that [consumer] defaults rose 8.2% in May compared with March as consumers overspent on Mother’s day presents.”

MORE ARTICLES ON