Living to disorderly default another day
TALK of a European default continues to rumble around the market ahead of the European Council's December 16-17 meeting.For now the European Central Bank has held the euro zone together by purchasing members’ bonds and providing liquidity to beleaguered banks. Although such stopgap solutions, like case-by-case bail-outs, are the path of least political resistance, the effort to avoid defaults at all costs could prove calamitous.Argentina’s recent default is illustrative. As in Europe today, Argentine politicians ruled out restructuring debts that looked unmanageable. Domingo Cavallo, Argentina’s respected finance minister, even took to the pages of the Financial Times to call the idea “ludicrous” and promise that “Argentina will not be lured by the call of the sirens”. And so throughout 2001 the country attempted increasingly desperate manoeuvres—two IMF loans, a short-for-long securities “megaswap” and finally zero-deficit budgeting—to stave off default.But market attrition eventually won out, and the failure to restructure Argentina’s debts earlier “ended up being a mistake” as Nouriel Roubini, an IMF visiting scholar at the time, subsequently acknowledged. The expensive struggle led to greater economic trauma and higher bond losses in the end, not to mention protracted legal wrangling.read more
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