Q&A factbox: Why Greek bankruptcy could be bliss

More and more economists are of the opinion that there is no way Greece will avoid default – some are even calling for it.

Benjamin Ong heads the Financial Standard Intelligence Unit with the Rainmaker group, while writing a daily column for the Financial Standard. We asked him what drove him to write the piece 'Bankruptcy could be bliss'?

Benjamin: There's general consensus in the financial markets that Greece would ultimately be bailed out this time, and every time it needs saving. But if this state of affairs becomes the norm, then the financial landscape would constantly be speculating on whether or not Greece would be bailed the next time it needs refunding.

And it looks like it will need to indefinitely. For despite already implementing a host of fiscal austerity measures – government spending and welfare cuts, increase taxes, pension reductions, wage cuts, job cuts in the public sector – and privatisation, the economy and its fiscal balances continue to deteriorate.

Like I wrote in my piece, Greece might ultimately come to decide “That it's better to die from a single shot of default rather than suffering death by a thousand (fiscal spending) cuts.”

The pain when it declares default would be no different from what it's currently experiencing now – perhaps more – but then it could move on and start anew without worrying about its next debt repayment and/or what new conditions would its benefactors demand before agreeing to release bailout funds.

This is why “bankruptcy could be bliss” for Greece. Although I would not say the same for the next in line – Portugal, Spain, Italy, the world.

This is the very reason why financial markets agree that Greece would not declare bankruptcy – contagion. The EU, the IMF and the ECB do not want it to.

It would be bliss for Greece but hell for everybody else.

WHAT'S THE PLUS SIDE OF A GREEK DEFAULT?

Any country that defaults must suffer its consequences – economic contraction, rising unemployment, financial market – stock, bond, currency – collapse, capital flight, hyperinflation, bank runs, political instability, social unrest, etc.

Greece had been suffering all of the following already:

Economic contraction – Greece is now in its fifth year of recession. The latest available data show real GDP contracted by 5.5% in the year to the first quarter of last year after slumping by 7.4% in Q4 2010.

Greek unemployment – As at November 2011, it stood at 20.9% from just around 7.0% before the GFC.

Stock market – the Athex Composite Index as at last night's closing is now down 85.1% from its peak (5334.5 points on 31 October 2007).

Bond market – 10-year bond yields are up by 3,362 basis points (closed at 33.71% last night from just 4.09% back in March 2007).

Political instability – PM Papandreou was booted out of office and replaced with Papademos last year and just recently 6 ministers resigned.

Social unrest. Need I say more?

In short, the plus side for Greece is that it would continue to suffer all these in the event of a default but then it would have wiped itself of all – or a majority of - its national debt. It'll also rid itself of, what I now consider, unrealistic demands by the EU, IMF, ECB and its private creditors - demands that only worsened its debt problem.

Greece's debt-to-GDP ratio has worsened to 160% last year from 145% in 2010 and 129% in 2009 despite all the fiscal spending cuts and privatisations that it had already implemented.

WITH SUCH HIGH UNEMPLOYMENT, HOW CAN GREECE REPAY ITS DEBTS?

Greece will 'never' be able to pay back its debts. It has to be forgiven its debts – either in full or a large chunk of it - or unilaterally declare default – as Russia did when it defaulted back in 1998.

These bailouts – and the accompanying demand for fiscal rectitude – only bury Greece deeper into that hole in the ground.

Why do you think Malaysian Prime Minister Mahathir Mohammed refused IMF bailout and its attached conditions during the Asian financial crisis?

DIDN'T OTHER COUNTRIES THAT DEFAULTED, SUCH AS ARGENTINA, GROW THEIR ECONOMIES?

Exactly my point. This is because economies that default rid themselves of the major millstone (debt repayment) that's tied around their necks – and for Greece the severe austerity measures that are demanded of them.

It allows them to reboot their system, so to speak.

IS A DEFAULT INEVITABLE, AND WILL IT BE MESSY?

One way or the other, this year or the next… or the next, Greece will have to default.

I don't think there is such a thing as a managed default. A default is, and will always be, messy. Greece already is a mess…and it hasn't issued a “stop payment” on its debts yet.

But Greece is not the problem; the problem is contagion when Greece is allowed to default.

Which makes wonder why Greece needs to kowtow before its benefactors when it's the one holding the ace – all four of them?'

Read Benjamin's article here.