As we have been arguing for over a year, a Greek default is inevitable. The question is how to perform it. With the Troika, IMF, ECB, EFSF etc involved, things are rather complex. Peter Tchir gives some color on the subject.
Europe continues to fight the wrong battle, and continues to spread contagion risk.
It is clear that Greece has had a solvency issue now for over 2 years. The ECB and Troika chose to treat it as a liquidity problem. Maybe, they could have argued that in early 2010, but by the summer of 2011 it was obvious to any credit observer that the problem was solvency, yet they continued to treat it as one of liquidity. That is scary because if they feel to see the problem correctly now, they will fail miserably. Not only is the problem clearly solvency, but now forced currency conversion has been added to the mix. Any “solution” from the EU must now address that risk, and it is not the same as solvency. Programs that can protect against solvency may do nothing for the redenomination risk.
Not only did Europe fail to address the problems, but in spite of convincing themselves that all these programs prevented contagion risk, they actually ensured contagion risk. That contagion risk, that they forced on themselves is now coming back to haunt them, and must be carefully addressed in any policy “solutions”.
Two Years of Bad Policy Have Created a Situation Like No Other
There is a lot of talk about what a Greek exit would or wouldn’t look like. People are comparing it to other defaults and currency devaluations. They are wrong. Greece is now unique in that almost all of the debt is owed to institutions that normally step in after devaluation. Greece is also unique in that it is leaving a currency union that is already fragile, and being the first to leave will open the floodgate of speculation as to what other countries will leave.
Argentina was bankrupt, a product of a stagnant economy, rampant crony-corruption, and—most important of all—of having its currency fixed to the dollar. This currency peg had created a huge credit bubble, and of course massive capital outflows as a result, eventually leading to the depletion of foreign reserves by the government and an inability to raise more funds on the open markets.
In other words, sovereign bankruptcy.
Coupled to these problems, in the months leading up to the December 2001 crash, people were aware that the country was going bankrupt—so they were quickly converting all their Argentine pesos into dollars, and then sending this money to safe havens overseas.
To solve these problems of sovereign insolvency and massive capital flight, and at the same time to stabilize the situation, on December 1, 2001, the Argentine government imposed the infamous corralito—literally, the “little bullpen”: A series of measures designed to hold in capital and prevent it from fleeing the country, while devaluing the currency to a more realistic, sustainable rate of exchange.