Saturday, February 6, 2010

Why I think Greece will default

I remember in 2008 thinking "of course Paulson, Bernanke and Geithner won't allow Bear, Lehman or anyone else default". I was wrong. And now I am thinking the opposite: that the EU will fumble the ball and allow Greece and maybe the other PIGS to default.

I think that this problem is going to come to a head faster than anyone realizes, while the EU leaders (Merkel, Sarkozy and Trichet) are still hoping that the Greek budget will satisfy the markets and the problem will go away. 

I have no doubt that there are behind-the-scenes discussions in Brussels about Plan B and Plan C, but I have little confidence that, when the markets close to Greece, they will be ready to intervene. 

Frankly, if the EU/EC really wants to calm the waters, they would preannounce Plan B so that it wouldn't have to be used (like Paulson's bazooka concept). 

The EU has two central problems: a common currency, but no federal government, no federal revenue and no federal balance sheet. It is an association with no real rules (if it had enforceable rules, Greece would not be where it is today). 

There are two alternatives: (1) the US model, in which the states are legally on their own and can default (as they have); or (2) the German model, in which state budgets are effectively controlled by the Finance Ministry. The EU says (1) states are on their own; and (2) default by a eurozone member is unthinkable due to the concept of "solidarity". 

Good luck sorting that out in the next couple of months.

No comments: