I usually read David McWilliams’ column in the Sunday Business Post. They are informative and easily understood. I also read articles by other economists who disagree with him, but they don’t write as well.
McWilliams says, that based on past history, a sovereign Greek default is likely. Ireland needs to prepare, he says, because, with an even bigger debt burden, we will be next in the market’s sights. He says:
My suspicion is that Greece will default. By this, I mean it will repudiate debt by renegotiating the terms of the debt simply because the population won’t tolerate the hardship associated with unemployment and rising prices. Greece also realises that the financial markets are forgiving. They are forward-looking.
An EU bailout would just postpone this default.
I sense that smart bond investors will use any putative EU bailout as the last opportunity to sell. The clumsy ones will buy, believing the government and brokers’ spin.
Since that column was published Sunday morning, the EU has agreed to a Greek bailout of between €40 and €45 billion. MIT professor, Simon Johnson, is not impressed. It is a short-term fix, but the problem will re-emerge if the Greeks fail to tackle their underlying problems. He uses the same type of language to predict what bondholders will do:
Often assistance packages of this nature just help “smart money” to get out ahead of a default. This could be the case here; 40-45 billion euros total money could last roughly one year. Both Russia and Argentina got large packages in the late 1990s but never regained access to private markets, so eventually everything fell apart.