Can a Greek default be prevented?

2011-06-03

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The latest downgrade of the credit rating of Greece by Moody’s rating agency, sends a clear message to the markets that Greece is on a 50% chance of defaulting on its debt. The downgrade has come in a time where European leaders are working on a second bailout package to Greece in order to save the country from defaulting on its debt, as this will have catastrophic consequences on the rest of the EU and can potentially tear apart the single European currency, the euro. The key point in this situation is that for Greece to receive extra money, its government must agree on a number of new austerity measures that will aim at saving more billions of euro so as to calm down the creditors and the troika (EU, IMF, ECB). This implies an audacious plan of privatizations of state property, further cuts in public services, increase in taxes, contraction of the public sector and wage cuts on public servants.

The problem with this is that the people of Greece are definitely going to react, since they have already been through strict austerity measures and that is why the “Indignant” are out on the streets. Therefore an announcement of new stricter measures that will practically deprive the people of the last vestiges of their savings will only succeed in inflaming more massive protests and things can easily get out of control should tensions rise.

Taking the above into account raises a serious question: Can Greece avoid default?
Personally I think that there is no way to do so, not any longer, since the strategy of the memorandum with the troika was from the outset directed towards an inevitable doom. It only worsened the crisis. No provisions to stimulate the real economy were enshrined in the memorandum. All that it included was a list of austerity measures that mistakenly omitted the impact these would have in the real market. The drafters of the memorandum and the Greek politicians who signed it, did not think of the economic consequences of the austerity measures, as they were falsely led to believe that the economy will continue to function in the same as it did before and thus they will be able to drain all the money they needed. In a nutshell, the memorandum and its failing policies, were a death contract for Greece.

Now there is no real dilemma. Greece will definitely have to restructure its debt or even default, since the real economy cannot endure new austerity measures. What the EU now wishes to achieve through a second bailout package is not to prevent the Greek default but to minimize the effects it will have on the rest of the EU. Plus it is a way for speculators within the European Union (mainly German and French banks, as well as Greek “investors”) to exploit the privatization plans, to buy property at extremely low prices. However the option of privatizations is the most dangerous for Greece as it means selling off essential assets at extremely low prices, which is by all means risky for national security and integrity, since those who will buy them will not necessarily have the most sincere sentiments.

In the light of these events, I will repeat what I wrote in a previous article that it is better for Greece to default today rather than take new austerity measures and still be lead to default in a year or more, from now, as then the situation in the real economy will be far worse. I know this is tough to say and even tougher to accept, but I believe it is only a matter of compromising with reality. After all delaying the inevitable will only worsen the situation. Instead of negotiating a new “safety” package, Greece should already be working on a strategy that would ensure the reconstruction of the economy after default and after the re-adoption of the drachma.</div>