Sept 19, 2011
Dr. Doom has given up hope for Greece.
In an FT piece, he says it’s time for Greece to default and abandon the euro.
The basic idea — which he outlined in a research piece a piece on Friday — is that Greece under the euro will lead to years and years of more depression and deflation. Even a restructuring of Greek sovereign debt won’t save the country, because it’s not competitive under the euro system, and it can’t grow. It needs currency devaluation, which the euro won’t allow for.
So the game is to default now, rip off the cord, default, and go back to the drachma.
Of course, the game then is to prevent total economic implosion:
Avoiding a banking system implosion after an EZ exit would entail, unfortunately, the imposition of Argentine-style measures—such as bank holidays (deposit freeze) and capital controls—to prevent a disorderly fallout; realistically, lots of collateral damage would occur, but this could be managed and limited. Banks could be recapitalized by the government through the issuance of recapitalization bonds; while this recapitalization would initially increase public debt, the reduction in public debt from a significant default would give some fiscal margin to achieve such recapitalization.
As for the rest of Europe, he’s confident that a Greek default can be done in an orderly, negotiated manner that doesn’t cause huge ripple effects.
We doubt the rest of Europe feels so sure about that.