There is a consensus in the corridors of power that if any eurozone member defaults or leaves, contagion and collapse are assured. This is a fairy tale designed to frighten voters into submission to bizarre government policies. It also ignores two historical lessons.
While the Santa-rallying markets have been suspiciously sanguine in the aftermath of the failed Greek presidential election on Monday and the ad hoc vote scheduled for late January which could - if left unchecked - lead to an unraveling of the Greek bailout and the expulsion of Greece from the Eurozone, events are now in motion that would end with the unwind of the world's biggest and most artificial currency and political union.
The head of the European Central Bank once again said today that a Greek default "would not happen". Every G20 official - in or outside the eurozone - will tell you the same thing: with markets as fragile as they are, it is unthinkable that a sovereign government would be allowed to default. Investors and experts are thinking about it all the same.
NEW YORK — Rating agency Standard & Poor’s on Tuesday raised Greece’s sovereign credit rating to B-minus with a stable outlook from selective default, citing Europe’s efforts to keep the country part of the euro.
“The upgrade reflects our view of the strong determination of European Economic and Monetary Union (eurozone) member states to preserve Greek membership in the eurozone,” S&P said.
By Simon Johnson
The big question of the week in Europe is deceptively simple – will any countries that share the euro as their currency default on their government or bank debts in the foreseeable future? The answer to this question determines how you regard bonds from countries such as Portugal, Spain, Italy, and Belgium.
So 2015 looks set to be a difficult year for countries struggling under heavy debt burdens. Only two months in and we have already seen precarious economic situations in states, including Greece and Ukraine, worsen substantially. Few would bet against the likelihood of a major debt restructuring in the near future. But have we become too afraid of the word lenders hate to hear — "default?"
Yves here. This post by Michael Bordo and Howard James finds significant parallels between the 1920s and the economic and policy conflicts facing the Eurozone, which does not speak well for them being resolved tidily. The post is dense at points but it is very much worth your attention.
By Michael Bordo, professor of Economics at Rutgers University and Harold James, professor of History at Princeton University. Cross posted from VoxEU
Steven CA Pincus, James A Robinson, 7 August 2011As financial markets around the world turn in fear of further government defaults, this column asks what lessons can be taken from a fiscal crisis that occurred over 200 years ago.Full Article: An historical view on government defaults: Lessons from the 17th century