Sunday, February 14, 2010

Does Greece threaten the "credibility of the euro"?

The principal rationale currently being peddled for an EU bailout of Greece is that a Greek default would cause a "collapse of the euro". This is silly. 

First of all, would a default by Hawaii cause the "collapse of the dollar"? How about a default by an investment bank with $700 billion in debt? The ECB, like the Fed and the People's Bank, has control over the external value of its currency. So this concern is a red herring.

What is a serious rationale for a bailout of the communist public-sector unions in Greece? The same rationale for bailing out the capitalists on Wall Street: because its easier to prevent a run than to stop one. The problem is the domino effect, whereby the market tests every vulnerable target (as it tested Goldman and Morgan Stanley after Lehman fell). It's cheaper to extend a lifeline to Greece now than Portugal, Italy and Spain this spring. 

I still expect Greece to default, which would be a VERY BAD THING. But the reason it would be a bad thing has nothing to do with the external value of the euro.

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