Why Greece won't default(Read article summary)
It's possible, but highly unlikely, that Greece will default on its debt.
Dusan Vranic/AP Photo/file
The Greek bond panic has been driven by two concerns: either that Greece will exit the euro and try to convert their euro bonds into "New Drachmas" (or whatever the reintroduced Greek national currency would be called). Or that Greece will default on its debt (and it is assumed, not repay their debts in full later).
I've already discussed why the euro area exit option is not realistic. What about the default option? Is that realistic?
It is possible, of course, but it is highly unlikely. And it is not an option with regard to escaping the necessary fiscal austerity measures.
Assume that Greece would default on its debt, and thus in effect say "screw you" to its creditors. Just who would then lend to them? I don't think anyone would, so Greece at that point would be cut off from debt markets (and also face massive law suits from creditors).
While Greece wouldn't have to pay interest or refinance bonds that reached maturity if it defaulted, it would still have a very large budget deficit, which would need to be covered by borrowing money. But if Greece defaulted, that window would be closed.
If Greece defaulted, it would in other words have to reduce its primary deficit (excluding interest payments) to zero immediately, which would require far more radical austerity measures than have already been proposed and implemented.
It is only when the primary balance becomes positive that default would become a potential way to solve cash flow problems of the Greek government. But that will likely not happen until at least two or three years from now, and since default would even then be associated with severe negative consequences and since the panic by that time will likely have been subsided, there is no reason to assume it will happen even then. Illustrating again why the current panic about Greece is largely irrational.
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