Greece's economic problems are getting worse rather than better, its
national debt is ballooning to levels that the financial markets believe will soon become unpayable.How will this process be managed?
At the moment, the strategy seems to be to play for time, tiding Greece over for a couple of years so that the European banks who would get their fingers burnt by a default have time to accumulate enough capital to cope with the expected losses. The precedent may be the Latin American debt crisis of the 1980s, when countries received some short-term assistance from the IMF, which allowed Wall Street banks to prepare for the introduction of so-called Brady bonds. These were bonds backed by the US Treasury that allowed struggling countries to restructure their debts.
Will Greece have to leave the euro?
Traditionally, a country that defaults on its debts also devalues its currency so that its exports become cheaper on world markets. Argentina adopted this approach when it defaulted a decade ago. For Greece, however, devaluation is not possible within the single currency, so it would have to leave the euro if it wanted to take this route. That does not currently look likely.
If Greece defaults would other countries seek to do the same?
Almost certainly. The new government in Dublin has already been lobbying in Brussels for a renegotiation of Ireland's bail-out agreement, and if Greece's creditors are forced to take a "haircut" of up to 60%, it is inevitable that the two other worst affected countries in Europe's sovereign debt crisis - Ireland and Portugal - will follow suit.
by Larry Elliott
source: guardian.co.uk
