Greek Tragedy: How do you evade default?

Economies in trouble are not easy to deal with. Try to tweak something here or there and looking for results is like waiting for an Aircraft Carrier to turn. This article from the American Enterprise Institute linked here talks about some of the complexities of dealing with the economy of Greece.

European banks can't just pay all the Greek tabs. But also, Greece’s threat to the global economy stems from the fact that it is both insolvent and in need of a markedly weaker currency to restore international competitiveness. Despite the International Monetary Fund (IMF) and European Union’s recently announced US$140 billion support package for Greece, any attempt by Greece to reduce its budget deficit from 14 percent of GDP at present to 3 percent of GDP (the target of the Growth and Stability Pact) without the benefit of a currency depreciation to boost exports will involve a major Greek economic recession.

And here is a real kicker: The basic flaw in the IMF-EU sponsored program to restore Greek fiscal sustainability through a program of draconian public expenditure cuts is that if successfully implemented it will have the unwanted effect of increasing rather than reducing Greece’s public-debt-to-GDP ratio. Since if Greece’s nominal GDP were to decline over the next few years by 30 percent as a result of a deep recession and price deflation, Greece’s public-debt-to-GDP ratio would arithmetically rise from its present level of around 120 percent towards 175 percent.

See how that works? Take the US as an example. If we get into real debt trouble and our bond prices fall and we lower our economic activity by cutting spending, then our GDP to debt ratio soars which will impact bond prices more.

Letting yourself get into trouble is not fun.....and there is no guaranteed soft landing.