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De fault of De Bankers?
May. 14th, 2012 06:06 pmOK, this is something that I've been meaning to ask for a a while. But, since it seems to be becoming potentially critical at the moment, I guess now's the time.
There seems to be an implicit assumption in all the discussion around the Euro crisis, for at least the last 18 months or so, that if Greece defaults on its debt, then it must, at that same point, leave the Euro.
To which my immediate response is: Why?
I like to think I'm reasonably clued up on such things. I even have half an Economics 'A' level, after all. (Yes, half. That's a story for another day.) But I can't see any technical or logical reason why "A, therefore B." Where A is a Greek government debt default, and B is the currency of Greece having to shift to the New Drachma, or whatever.
Euro notes are, of themselves, government bonds of a sort, of course, as is any national currency. An odd sort of government bond to be sure, with no fixed redemption date and a 0% coupon, but a bond nevertheless. A limited company could, in theory, default on its class B debentures, but still keep paying the class As. (This could have all sorts of generally negative consequences, but different classes of debt are, when all's said and done, different classes of debt.) Likewise, a nation state could say, "You know those x% 5 year gilts with a repayment date of next week? Afraid it ain't gonna happen. But, you can still bring your five pounds notes in to the national bank and we'll give you five shiny pound coins for 'em." For the Euro, this is even more the case, in that the currency is no longer exclusively national in any case.
So, why would a default on Greek government debt imply that Greece would have to leave the Euro?
There seems to be an implicit assumption in all the discussion around the Euro crisis, for at least the last 18 months or so, that if Greece defaults on its debt, then it must, at that same point, leave the Euro.
To which my immediate response is: Why?
I like to think I'm reasonably clued up on such things. I even have half an Economics 'A' level, after all. (Yes, half. That's a story for another day.) But I can't see any technical or logical reason why "A, therefore B." Where A is a Greek government debt default, and B is the currency of Greece having to shift to the New Drachma, or whatever.
Euro notes are, of themselves, government bonds of a sort, of course, as is any national currency. An odd sort of government bond to be sure, with no fixed redemption date and a 0% coupon, but a bond nevertheless. A limited company could, in theory, default on its class B debentures, but still keep paying the class As. (This could have all sorts of generally negative consequences, but different classes of debt are, when all's said and done, different classes of debt.) Likewise, a nation state could say, "You know those x% 5 year gilts with a repayment date of next week? Afraid it ain't gonna happen. But, you can still bring your five pounds notes in to the national bank and we'll give you five shiny pound coins for 'em." For the Euro, this is even more the case, in that the currency is no longer exclusively national in any case.
So, why would a default on Greek government debt imply that Greece would have to leave the Euro?
