“You cannot turn a pig’s ear into a silk purse, and there is no point in pretending that an economy like that of Greece could somehow become a mini-Germany ”with appropriate resolve and discipline”. And frankly, why should Greece wish to do so? From this standpoint, a mistake was made by admitting into the EMU certain nations who never should have joined the currency union in their current state. Greece was a salient example.”Woody Brock [1]
The last weekend in May took me to Reykjavik for the first time since the credit crisis brought down the Icelandic banking system and with it much of the local economy. I have always enjoyed visiting Iceland. It is a truly amazing country, offering a splendid mixture of fantastic scenery and unrestrained friendliness. You just want to come back for more; however, somehow I expected the crisis to have left deep scars. I am pleased to say that nothing could be further from the truth.
It made me think. How is it possible to be pushed to the very edge of the cliff only to bounce back so magnificently less than 24 months later? Does that hold the key to understanding what is happening to Greece at the moment and how we should expect events to unfold from here?
Prepare for the haircut
Let me begin by offering you this observation: Greece will almost certainly default before this crisis finally blows over, but it may take several more years before they run out of options. Furthermore, the default may be structured in a way that allows them to call it something different. But investors in Greek sovereign bonds will have to take a haircut whatever name they put on it.
The €750 billion rescue package presented a couple of weeks ago should be enough to keep Greece, Spain and Portugal afloat for a couple of years, but Germany’s willingness to underwrite the profligacy of other eurozone members will likely run out well before Greece can realistically turn the corner.
Here is the quandary facing Greece: The austerity plan which it has now committed itself to is quite simply incompatible with a return to decent GDP growth anytime soon, yet not severe enough to prevent public debt from continuing to escalate. And, according to the arithmetical logic of the situation, if the Greek economy doesn’t return to a growth…
