AGAINST a Greek Default
1. GREECE IS REFORMING
It’s just a question of time. If Greece is given more time, it can push through much-needed structural reforms that will unlock potential growth. Markets will see that Greece has reformed and is taking its debts seriously, and borrowing costs will go down.
2. GLOBAL DEPRESSION
A Greek default would affect more than just Greece. Financial markets would panic at the thought that more countries might default, which would spark off a vicious spiral and make mass-defaults more likely as borrowing costs rose to accommodate perceived risks. At worst, debt contagion could spread to every country in the Eurozone (and beyond), plunging the world into a global depression.
3. THE TIMING IS WRONG
Even if Greece is insolvent and must default eventually, now is the wrong time. The global financial system is too fragile, and sufficient firewalls haven’t yet been put in place to protect the Eurozone. Greek bail-outs should continue until the economic situation in the rest of the world has strengthened and the blow from a default can be absorbed.
4. EUROPEAN SOLIDARITY
Allowing Greece to default would be abandoning the European ideal of solidarity between member-states. It would signal a return to an “each country for itself” mindset that could fatally undermine trust in the EU.
FOR a Greek Default
1. GREECE IS INSOLVENT
It’s not just that Greece is struggling to meet debt repayments in the short-term, it’s that Greece will never be able to keep up with the interest on its debt. Instead, its debt will grow until it’s unmanageable. A Greek default now would be painful, but it’s better to get it over with quickly and “wipe the slate clean” before the debt-bubble grows even larger.
2. MORAL HAZARD
Continuing to bail-out Greece would reward irresponsibility from both lenders and governments. It will encourage the idea that, should anything go wrong, the IMF and ECB will always ride to the rescue.
3. FIGHTING DEBT WITH DEBT
Greek “bail-outs” are actually a euphemism for “emergency loans”. In other words, the EU is lending Greece even more money and trying to fight debt with more debt.
4. LEGAL CHALLENGES
The EU treaties contain a “no bail-out clause”, and many of the actions that the European Central Bank (ECB) has undertaken to prevent a Greek default (such as buying up Greek bonds in large numbers) are, if not in clear breach of the treaties, then at least legally dubious.