Incoming Citigroup Chief Economist Willem Buiter believes Greece still has it within their means to prevent a national default. In the video below, he discusses with Bloomberg what the crisis in Greece means not just for the Greeks but also for the Brits, Americans, Irish, Portuguese, Italians – all of whom have less than ‘pristine’ government finances. What happens in Greece is pivotal for the global economy because a default there would likely trigger distress elsewhere.
As for talk of unsustainable deficits, it seems premature to start worrying about inflation and higher interest rates when we are still in a deflationary environment. I don’t buy Buiter’s arguments on Labour’s loss of fiscal credibility mandating some pain upfront. Government should wait until it sees the ‘whites of inflation’s eyes’ before firing anti-stimulus bullets. And if they do begin firing, addressing future liabilities (everywhere) or military spending (US only) is just as effective as cutting other present discretionary spending.
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Originally published at Credit Writedowns and reproduced here with the author’s permission.
One Response to “Buiter: “It’s Five Minutes to Midnight for Greece””
Greece cannot avoid sovereign debt default because Greece has both large fiscal and current account deficit with more than 100% public and external debts.There are two solutions. First is the currency depreciation that would reduce the external imbalance; however, this solution cannot occur under EURO currency.Therefore, Greece has only one choice that is to reduce fiscal deficit by reducing government spending and increasing tax. There is no other solution that other European countries to support Greece because if they decide to help Greece, their people will face the economic stagnation like Greece.The credit rating agency also fail to indicate the default risk of Greece sovereign debt. If we look at deficit and debt level, Greece rating should be junk and if we look at the exchange rate policy using EURO currency, we also know Greece must reduce the fiscal deficit if Greece have not done that, all rating agency should rate Greece as junk not A or BBB like this.And if Greece decide to have the ongoing large fiscal deficits, European countries must act something before Greece will cause gigantic debt default that may harm all European countries or may end EURO currency.