Greece Will Not Default--Ever, Maybe

Greece will never default on its sovereign debt. That is, at least what Greece’s finance minister George Papaconstantinou says. His argument has less to do with his nation’s precarious situation than with his belief that a default would ruin the eurozone.

Papaconstantinou told the FT, “People fail to see the costs to both Greece and the eurozone of a restructuring: the cost to its citizens, the cost to its access to markets. If Greece restructures, why on earth would people invest in other peripheral economies? It would be a fundamental break to the unity of the eurozone.”

It may not be that simple. The eurozone nations and the IMF are in the process of loaning Greece $130 billion, if the country can reach budget goals over the next three years. Greece may not be able to do that. Its GDP continues to fall. New taxes may not bring in as much as Greece hopes as unemployment stays high and businesses face the challenge of making money in a difficult economy. Greece’s powerful unions have also periodically shut parts of the public and private sectors. If these work stoppages continue, GDP could be effected.

Greece also has a total national debt of $400 billion. Investment experts like Bill Gross at Pimco and George Soros believe that the southern European nation will not be able to handle the debt service on this balance unless GDP growth moves up dramatically, and there is no reason to believe that will be true. Greece’s economy is highly dependent on tourism, and the problems  the nation is having are likely to keep some visitors away.

Greece would like capital markets investors to believe that its debt is safe, particularly because it can lean on the stronger economies in the region. At some point, Greece will almost certainly not be able to survive financially without their aid.

Douglas A. McIntyre