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Greek default is inevitable

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posted on Jun, 10 2011 @ 04:17 AM
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LONDON (MarketWatch) — The European Central Bank, with its staunch opposition to sovereign debt restructuring in Europe, is making a bad situation worse. By threatening to withdraw support for banks in countries such as Greece if they restructure their debts, the ECB is practically inciting runs on banks.

The argument that Greek state paper could no longer be used as collateral in such cases hardly justifies such a potentially destabilizing step. The ECB is effectively the lender of last resort to such banks. If depositors believe it is about to pull out, then they will withdraw money from the banks — and we will face a self-fuelling downward spiral.

The debt problem of peripheral Europe is structural. It cannot be solved by piling debt on debt. There is an analogy to a Ponzi scheme, under which more money is continually paid in to keep the pyramid-like edifice from collapsing. The debt/GDP ratio increases over time because new loans are given to pay old debt and to finance the remaining fiscal gaps.

With regard to the fear of contagion to other countries, explicit debt relief for the most-badly hit EMU members may actually relieve the pressure on Spain and others — as long as the money used today to pay bondholders is channelled directly to recapitalize and sanitize the banking system.

There is a good argument for taking necessary decisions on debt restructuring sooner rather than later. Further “muddling through” is a recipe for disaster. Unless a proper program of coordination and adjustment combined with debt relief is decided soon, Europe faces the risk of becoming the next emerging market.


www.marketwatch.com...

Basically Blejer is arguing that debt relief is the only solution to the mess. However I recall watching an analyst last night on CNBC saying that all this is unknown territory and the consequences of debt restructuring could be very severe or even catastrophic to the region, I don't recall why he assessed it as such, other than its contagious potential.




posted on Jun, 10 2011 @ 04:29 AM
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There is an analogy to a Ponzi scheme, under which more money is continually paid in to keep the pyramid-like edifice from collapsing.

analogy? really?
Let the run begin.
Wont it also filter up?
It's not as if we would see a Rothschild in a soup line is it?
But their cleaners, gardeners, ..., they know where they live.

As for privatization... it's just BS.
Privatize only the profit....
And keep the debt with the public.
edit on 10-6-2011 by CitizenNum287119327 because: (no reason given)



posted on Jun, 10 2011 @ 05:15 AM
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By threatening to withdraw support for banks in countries such as Greece if they restructure their debts, the ECB is practically inciting runs on banks.


If Greece defaults, Ireland and Portugal would almost surely follow suit and unload debt in a similar fashion.
Obviously the ECB has a lot at stake trying to prevent a cascade of defaulting member nations so they are doing everything possible to make defaulting an unattractive option.

Some analysts have pointed to the 2002 debt default of Argentina as a possible plan for Greece.
There may be too many competing factions within Greece to pull off a successful default though.
Greece would need a strong popular and cohesive government that could stand on its own, print its own currency and rule the country as a fiscally autonomous state.



 
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