Publically, Eurozone officials continue to pledge their full support for Greece and refuse to acknowledge the possibility that Greece may never be in a position to repay its debt obligations. Private conversations, however, likely take on a much different tone.
The markets certainly have little faith in Greece’s ability to survive as a solvent entity. The current yield on 2-year Greek bonds is rapidly approaching 50 percent which is hardly a vote of confidence. For many, the focus at this point should simply be to shelter the remaining Eurozone members from a similar fate.
In order to convince Eurozone officials to come to Greece’s rescue in the first place, the Greek government agreed to implement a wide rage of “austerity” measures to address the country’s chronic deficit habit. Comprehensive spending cuts and the introduction of new taxes and revenue-generating schemes are part of the plan to close the budget gap.
Naturally, the government’s deficit fighting plans have not been well received by the citizens of Greece. Athens has been the scene of mass protests bordering on all-out rioting and while it was never very likely the government would meet its austerity targets, public opposition has all but ensured the goals will remain unfulfilled.
What is lost in the rhetoric is the fact that the next emergency payment of 8 billion euros is due within days but payment is contingent on meeting the austerity targets. If the payment is suspended, Greece will effectively run out of money by the middle of the month and will not be able to meet its next round of debt payments.
Few expect the money to be withheld but this constant threat of insolvency is simply not tenable; worse still, it is highly destructive to global markets. Harvard Economist Martin Feldstein went on record earlier this week to state the case for allowing Greece to default.
“The only way out is for Greece to default on its sovereign debt”, Feldstein wrote in an article published Wednesday. “When it does, it must write down the principle value of that debt by at least 50 percent.”
In other words, if a default is indeed unavoidable, let’s get it over with and do what we can to minimize the ill effects.
This means protecting European banks from the massive losses these institutions would face in the event of a Greek debt write-down. Forcing the financial system to take the brunt of the default could trigger further Eurozone insolvencies as credit availability would plummet. For countries including Spain and Italy, there is still a great need for access to stable and affordable credit as both struggle to address their own deficit issues.
By putting an end to the hostage scenario global markets have been subjected to for well over a year now, we can start to heal infected balance sheets and restore investor confidence. Few believe Greece can avoid a default so let’s face the fact and concentrate on minimizing collateral damage.
Scott Boyd is a currency analyst and a regular contributor to the OANDA MarketPulse FX blog