By Arnold Kling
Those experts who say that a default will be a solution are assuming that the default take[s] place as part of an orderly negotiation, so that either private-sector lenders or international institutions are willing to renew lending to greece once the debt has been restructured. But if greece undertakes a unilateral default, it will be faced with as much austerity, or more, than what the imf is proposing.
Megan McArdle makes the same point.
Even if it makes no interest payments at all, Greece needs to borrow money in order to keep funding all the spending it’s committed to. And it can’t really finance that domestically, since for various reasons, a Greek government default would render most of its banking system at least temporarily insolvent. Papandreou is passing these cuts because these cuts are what is necessary to get external institutions, like the EU and the IMF, to keep funding his primary deficit. If he refused, the financing would dry up, and Greece would be forced to make even deeper cuts.
Megan and I both think about Argentina as a probable role model for Greece.
I feel very uncomfortable attempting to play the role of “expert” on the issue of a sovereign debt crisis. I think that economics plays very little role. Instead, you have credit market psychology on the one hand and political negotiations on the other.
There is nothing that I am quoted as saying that I wish I could change. But it would not surprise me if down the road some of my comments turn out to be way off base.