How Worried Should You Be About A Greek Default?

My answer:  not at all.  In fact, the opposite:  we should all be praying for a Greek default.

The Greek default business has been mostly off the front pages of the U.S. papers for a while, but that doesn't mean that it has gone away.  Greece has some big debt payments coming due as early as June, and many think they won't have enough money to pay without some infusion of cash from EU colleagues or some "restructuring."  ("Restructuring" means that the creditors agree to take less than they are owed and not call it a default.)  And thus endless "negotiations" take place over some kind of "deal" to avoid default.

The benefits to everyone else of Greek default are obvious.  Greece's politicians have made ridiculous spending promises to their voters, counting on other people's money to fulfill the promises.  They way overpay their government workers, demand pitifully low productivity, give out lavish pensions and benefits, don't enforce their taxes -- and pay for it all with borrowing.  When they default the borrowing spigot turns off, at least for a while.  They literally can't pay their bills at the level they are running, and they will have a modicum of financial discipline forced upon them.

Of course there would be losers.  But the only obvious losers are the holders of the defaulted debt.  The people who have lent money to Greece in any recent time frame are not people that anyone should feel sorry for.  Greece's financial irresponsibility has been obvious for many, many years.  Lenders to Greece have gotten premium interest rates for most of human memory.  Why does anyone else owe them a bailout?  Other than lenders to Greece, the potential losers from a Greek default are not obvious at all, and would only emerge if there is some kind of systemic financial crisis that follows the default.

And yet these endless negotiations continue, with the seemingly universal assumption that there will be a bailout or restructuring of some kind if only the recalcitrant Greeks agree to sufficient "conditions."  What I don't understand is, why is anyone even talking to them?

The only answer I can find boils down to -- fear of the unknown.  As one of many examples, consider Rick Moran today at American Thinker:

Thankfully, American banks have very little direct exposure to a Greek default.  But the wild uncertainty of what would happen to the rest of Europe in the case of a Grexit is extremely worrisome to American financial institutions. . . .  But no one in Europe is sure if these measures [taken by European pooh-bahs so far] are enough.  That's because managing expecations following a Grexit cannot possibly take into account the panic factor.  And as swiftly as crisis can move in these days of instantaneous news reporting and speed-of-light transfer of funds, it is more than a distant possibility that panic could overwhelm the system and start a domino effect of collapsing banks in every corner of Europe.

In an afternoon, the international banking system could collapse.

Really?  Of course, I can't predict what will happen with certainty, but frankly this is ridiculous.

And why is this the unknown?  Sovereign defaults happen all the time.  Argentina, with about 4 times the population and two plus times the GDP of Greece, defaults regularly -- most recently last year, and the time before that in 2001.  Venezuela, well over double Greece in population and close to double in GDP, is about to default, and nobody seems to think that that poses any great threat to the world financial system.  Russia, ten times or so the size of Greece in population and GDP, defaulted in 1998.  And I could go on and on.

Well, Greece is part of the Euro.  Does that make a difference?  Only in the sense that nobody knows.  Here is Charles Wyplosz writing today at the Credit Writedowns site:

What makes the coming event interesting is that it will be the first time that a default occurs within a monetary union.

I would dispute that.  Eight U.S. states defaulted on their debt in the 1840s.  Doesn't the U.S. qualify as a monetary union?  Nobody bailed those states out and they didn't exit the dollar.  Is the world different today?  Sure.  But do any of the differences constitute a reason to panic?

I have a very simple proposition:  If the EU can be buffaloed into bailing out Greece by use of threat of "global financial collapse" or something like that, then there is no end to it.  Sooner or later we either have to pour the entire world GDP down the infinite maw of Greece, or toughen up and let the default happen.  The financial institutions need to learn now how to harden the financial system to deal with defaults, or else the Portugals and Italys of the world will follow Greece's example and hit up everyone else for a bailout.  Best to do the default sooner rather than later.