Wednesday, April 28, 2010

Will Greece default on its sovereign debt?

I won't go so far as to say that fears about the fiscal health of Greece and the rest of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) are "overblown" since these countries really do have severe fiscal problems (as does the U.S. and UK, for that matter), but the concerns need to be put in the perspective of one essential factor: eventually, ultimately, somehow, someway, Greece (and the rest of the PIIGS) will, with absolute certainty, be bailed out in some way, shape, or form by the European financial authorities. The specific details and terms and timing of any bailout may be up in the air, but there is simply too much at stake and too much self-interest in preventing a sovereign default in Europe for the relevant financial authorities to do anything other than do as many bailouts as are needed.

To be sure, nobody wants to do a bailout and bailouts, as a preference, should be considered out of bounds, but this is about reality, not an academic exercise and test of what the proper answers are to an academic exam. Sure, economically a bailout is "unacceptable", but this is really a political problem, so academic ideals get tossed to the wind.

I'm certainly not advocating that anyone should buy or hold (or sell) the sovereign debt of Greece or any other country, but the suggestion by many, as echoed endlessly by the media, that "contagion" from Greece, et al will cause another global financial crisis is, to put it simply, absurd. Sovereign default simply will not happen in the current political regime.

To be sure, the European financial authorities have their hands full, but that in no way indicates that anyone here in the U.S. should lose even two seconds of sleep worrying about the impact of the sovereign debt of Greece or any other country on their own investments.

Besides a series of short-term bailouts, ultimately it will be incremental improvement in global economic growth that will help Greece climb (slowly) out of its financial hole.

In short, It is exceedingly unlikely that Greece will default on its sovereign debt regardless of the gloominess of the short-term economic forecasts for Greece.

In other words: No.

-- Jack Krupansky

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