The Eurozone Is Not Ready Politically for a Default

On Tuesday night, I spoke to Amanda Lang and Kevin O’Leary about Greece. The question was whether they were going to default and leave the euro zone. My response is that the euro zone is not ready politically for a default and so I think some sort of bailout deal is likely over the short term.

Over the longer term, I see nationalism leading to a Greek exit from the euro zone if the present austerity path continues. Would that be a positive event? No. Greece’s banking system would be crippled. The country would be cut off from international bond markets and capital flight would start when the first hints of euro zone exit surfaced. Moreover, the potential for high levels of inflation and economic and political chaos is large if the Greeks left the euro zone.

The right thing to do is to recapitalise the euro zone’s banks, support a pro-growth policy and then take haircuts where the debt burden is unsustainable (Greece and probably Portugal at a minimum). But that isn’t what’s happening now. Instead, we are getting debt deflation and extreme parties gaining support. It’s almost as if some policy makers have decided to make any deal so unpalatable that it forces Greece out no matter what.

This post originally appeared at Credit Writedowns and is posted with permission.