Wednesday, February 10, 2010

Will Berlin save Athens?

Here is my fearless prediction: I still think that Greece will default. 

I don't see the Germans actually becoming the guarantor of all eurozone government debt. Germany does not print its own money, and also it will want to protect its AAA bond rating. 

Politically, the German public would react very negatively to the idea of washing 60 years of fiscal discipline down the  drain with the stroke of a pen. (And the optics are a bit awkward when, just as Berlin is considering aid, Greece is on strike.) So I just don't see this deus ex Germania thing working out. 

Next up as a possible savior would be the IMF, that has already offered to help. But I am skeptical that the Greeks would be able to accept Latin American-style conditionality. The IMF doesn't fund until the agreement is signed. 

So my prediction is that Athens will ultimately choose default, and the firewall will have to be moved to a more credible country. (And I am not at all sure that Portugal is any more credible than Greece.)

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