Greece still in trouble

The IMF should impose default on Greece to end the charade
She said the model is the Uruguay default in 2003, conducted under the auspices of the IMF when she was working at the Fund. “Everybody got together in a civilized way, and it was very successful,” she said.

The average haircut was 13pc. Maturities were shuffled. Uruguay was praised all round.

Greece is a tougher nut to crack. French banks with €80bn and German banks with €40bn (and British banks too) that bought so much Greek debt at a few basis points over German Bunds in 2006 and 2007 will have to accept a bigger discount to atone for their epic error, perhaps 25pc — though Prof Reinhart did not put a figure on it.

At least US subprime had the excuse of being opaque. It was always obvious that Greek bonds was not equivalent to German bonds, and that country in a currency union running a current account deficit of 15pc of GDP was trouble waiting to happen. Creditors bought the debt on the basis of a political calculation, that EMU would bail out Greece if necessary. It was pure moral hazard.

This “pre-emptive restructuring”, in IMF lingo, has to be handled with care. “When people say there is no contagion risk because Greece is small, they are completely wrong. Thailand was a lot smaller in 1997, and look what happened.” Indeed, it set off the Asian financial crisis.

A Greek default would be twice the size of the two largest defaults in history put together — Argentina and Russia — at least in nominal terms, nearing €300bn. The “demonstration effect” in a long string of countries both inside and beyond EMU might be chilling.

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