The bottom line for me is that Greece’s current debts and any new loans that get extended from here are not going to be repaid in the present-value sense defined above. The current debt load and its associated interest bill are simply too big. The only solution is default on a significant portion of outstanding Greek debt. Indeed, significant debt restructuring is a necessary step for Greece to move forward, whether within the euro or based on a new currency. My view is that any realistic negotiations at this point simply have to take those facts as given.
My bottom line is to suggest that in forecasting the outcome of sovereign debt crises, assume that everyone’s goal is to make defaults as opaque as possible. For a small country like Greece, there ought to be many ways to do this. When the crisis hits Japan, it will be more difficult. When it hits the U.S., it will be more difficult still. But by then the international technocrats will have had a lot of practice.
I think there is a threshold level, in dollars, at which a default will be officially recognized or not. Argentina in the early 2000s was clearly not over that threshold level in terms of dollars. I now suspect (with this morning’s rumors about a deal) that Greece has probably defined the level in the case of sovereign countries, and I think Illinois is going to define it in the case of US states at some point in the next 5-10 years.
Beyond those thresholds, CBs and the corresponding governments will print and buy whatever debts need to be bought. Eventually, this will apply to equities, too.
All debts are self liquidating under negative interest rates, but that is probably too far to be credible. Equity for debt is flexible.
In the case of Greece, equity in what, exactly?
State-owned assets?
And if Greece decides it won’t give the equity either?
Then Societe Generale hires a mercenary force to start seizing Greek islands in the Aegean and the era of for-profit corporate sovereignty begins in earnest.
This concept of ‘opaque default’ sounds about right to me. A certain amount of ‘opaque bailout’ is probably also in the mix.
Doesn’t the national defaults going to hit a variety of European nations before the US? Looking at the long term fiscal issues Germany is way worse than either US and France because Germany has low birth rates. Like it or not higher birth rates does a lot to cover poor fiscal policies while good fiscal economies will crash because of low birth rates. How do you convince low wage families to have more children?
Should we also think about Ukraine as the the first demographic bust as the population is over 10% lower than 25 years ago?