Sunday, March 11, 2012

Quote of the Week from p.98 of Carmen Reinhart and Kenneth Rogoff’s outstanding book, This Time Is Different: Eight Centuries of Financial Folly (2011)
“Greece, as noted, has spent more than half the years since 1800 in default.”
Over the past three years, countless officials from the EU, ECB and IMF have proclaimed that no country within the Eurozone would be allowed to default. Given the history of many European countries, especially Greece, trying to prevent default seemed absurd yet authorities initially appeared willing to provide endless sums through bailouts to avoid a single default. Although Greece has been loaned funds in excess of the initial amount of debt outstanding, the countries economic deterioration and continually lax collection of taxes proved to much for the authorities. As of Friday, Greece has once again defaulted on its sovereign debt.

Although Greece’s default will create losses for the private sector of around 100 billion euros, Greece’s debt outstanding still remains more than 160% of GDP. With the economic contraction picking up speed (last quarter GDP was down 7.5% on an annual basis), any hopes of that percentage decreasing in the near future are ridiculously optimistic, if not impossible. By practically any standard, Greece is currently living through a Depression that appears to have no end in sight.

The majority of Greece’s outstanding debt will now be held by the EU, ECB and IMF. These holdings are senior to all other claims, making future defaults more difficult and complicated. Regardless of these hurdles, Greece can not and will not repay the current debt outstanding. Another default/restructuring is a practical certainty and will likely occur in the next couple years. Hopefully by that time the Greek people will have an elected leader that places the interests of the people first and finally takes Greece off the Euro.

European authorities tried to ensure this time was different by preventing sovereign defaults from ever occurring again. History was not on their side and ultimately won out, as it has for many centuries. In the end, this time was not different and Greece will likely spend more than half of the next decade in default as well.

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