Rogoff, Reinhart and Krugman on Greece and sovereign debt risks

Rogoff in his new article on Greece:

Some view Greece as Argentina revisited, noting the stunning parallels with the country that in 2001 set the record for the world’s largest default (in dollar terms). Others, such as Greek Prime Minister George Papandreou, see the country’s problems as difficult but manageable, and complain of interference from ill-intentioned foreign speculators.

Avoiding default may be possible, but it will not be easy. One has only to look at official data, including Greece’s external debt, which amounts to 170% of national income, or its gaping government budget deficit (almost 13% of GDP).

But the problem is not only the numbers; it is one of credibility. Thanks to decades of low investment in statistical capacity, no one trusts the Greek government’s figures. Nor does Greece’s default history inspire confidence.

As demonstrated in my recent book with Carmen Reinhart This Time is Different: Eight Centuries of Financial Folly, Greece has been in default roughly one out of every two years since it first gained independence in the nineteenth century. Loss of credibility, if it comes, can bite hard and fast. Indeed, the historical evidence slams you over the head with the fact that, whereas government debt can drift upward inexorably for years, the end usually comes quite suddenly.

A very good interview of Carmen Reinhart in WSJ on Greece economic situation and debt levels. She says the next round of crisis is the sovereign debt crisis.

WSJ: How serious a danger do you see in Greece right now?

REINHART: Since independence in the 1830s, Greece has been in a state of default about 50% of the time. Does that tell you something? They were in a state of default until the mid-1960s. If you relocated Greece right now outside of Europe, anywhere, you plop it down in Latin America or Asia or anywhere else, bet on an Argentina-style default. But it is a part of Europe. The European community sees itself very threatened by this. They’re going to do what they can. What I think is a likely scenario is that rather than have a default with a big bang, we’ll have a quieter type of default. If you look at a Standard & Poor’s definition of a default, it is anything that changes a debt contract to less favorable terms from the original contract to the lenders. In other words, lower interest rates or longer maturities. What we’re already seeing in Greece is the makings of that. We’re going to see a voluntary and less-than-voluntary shifting in Greece from marketable debt to non-marketable debt, with a bit of arm twisting.

WSJ: The market is asking, ‘Who’s next?’

REINHART: There are a lot of scary scenarios out there. Take governments that were virtuous governments, and continue to be virtuous. I’m talking about Ireland now. Their public debts were trending down and they have acted quickly and they’re credible. But external debt in the private sector is huge, more than 300% of GDP. In a crisis environment, private debts become public debts pretty quickly. Who knows what will happen with the Iceland referendum, and whether they vote to default on the Danish and the Brits.

WSJ: Are we seeing a second-wave of financial distress?

REINHART: Ken and I have been arguing fairly forcefully that historically, following a wave of financial crises especially in financial centers, you get a wave of defaults. You go from financial crises to sovereign debt crises. I think we’re in for a period where that kind of scenario is very likely. I don’t think a repeat of the fall of 2008 is at stake here, where it looks like the world is going to end. But I do think there is still, for reasons that are beyond me, quite a bit of complacency out there. Eastern Europe is another source of concern, and Europe has limited resources. You can rescue one. You can maybe rescue two. But you can’t rescue all of them. The Baltics are very vulnerable. Romania is vulnerable. Hungary is vulnerable. Problems in these countries feed back to their lenders. Austrian bank exposure to Eastern Europe is great. The Italian exposure to Eastern Europe is great. The Swedish exposure is non-trivial. You started out with a major financial crisis in 2007 and 2008, in which some of these countries have seen their worst recessions, in a way that really harms fiscal sustainability, even if you were in a good shape fiscally at the outset of the crisis. It is the pattern that has been prevalent in the past, that these major financial crises have been followed by an afterwave of debt crises.

Though Krugman says much of this in US is Fiscal scare tactics:

The main difference between last summer, when we were mostly (and appropriately) taking deficits in stride, and the current sense of panic is that deficit fear-mongering has become a key part of Republican political strategy, doing double duty: it damages President Obama’s image even as it cripples his policy agenda. And if the hypocrisy is breathtaking — politicians who voted for budget-busting tax cuts posing as apostles of fiscal rectitude, politicians demonizing attempts to rein in Medicare costs one day (death panels!), then denouncing excessive government spending the next — well, what else is new?

The trouble, however, is that it’s apparently hard for many people to tell the difference between cynical posturing and serious economic argument. And that is having tragic consequences.

For the fact is that thanks to deficit hysteria, Washington now has its priorities all wrong: all the talk is about how to shave a few billion dollars off government spending, while there’s hardly any willingness to tackle mass unemployment. Policy is headed in the wrong direction — and millions of Americans will pay the price.


5 Responses to “Rogoff, Reinhart and Krugman on Greece and sovereign debt risks”

  1. crisismaven Says:

    In and of itself a Greek bankruptcy or bond default should -in theory- not affect the Euro as such very much, Greece being maybe 3% of the total. However, just as a Californian bankruptcy (probably inevitable, large US cities at least are already contemplating insolvency, ten idividual states may well follow) would reflect badly on the “state of the Union” as a whole so would the default of on EU country, coupled with the rising interest rates and thus further destabilisation of the remaining over-leveraged member states, make investors wonder when sovereign default across the board is likely. Thus they wouldn’t commit themseves to bonds of longer maturity and that’s the beginning of the end.

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