The IMF, Greece and Europe: who benefits?
What are the lessons from the I.M.F.'s intervention in Argentina and other troubled economies?

pguilliatt/Flickr

Article Highlights

  • At this stage, Greece does not have many good economic policy choices

    Tweet This

  • Greece could learn from #Argentina's past devaluation and default - exit early

    Tweet This

  • Greece is lucky in that they can't get shut out of the international market by the US and UK (unlike Argentina)

    Tweet This

At this stage of its economic crisis, Greece does not have good economic policy options. Defaulting on its sovereign debt and exiting the euro will almost certainly be a traumatic experience for Greece that will necessitate draconian capital controls. Yet attempting to hew the International Monetary Fund policy line of no default and no devaluation will almost certainly exacerbate Greece's already very deep recession. And, by so doing, it will create those economic and political conditions that in the end will make it impossible for Greece to repay its debt and to remain within the euro.

Argentina's experience with devaluation and default some 10 years ago would suggest that Greece's interests would be best served by an early large default and an early exit from the euro. Since while such a route is all too likely to be painful in the short run, it would at least offer Greece the prospect for an eventual economic recovery that the I.M.F. policy approach would not. It would also spare Greece a year or two of further wrenching recession under I.M.F. tutelage only to find that default and exiting the euro was the inevitable result of Greece's present state of insolvency.

In considering the option of defaulting on its sovereign debt, Greek policymakers should be mindful of one great advantage that they enjoy over Argentina. Whereas most of Argentina's external sovereign borrowing was contracted under American or British law, 90 percent of Greece's sovereign borrowing is covered by Greek domestic law. This offers Greece the opportunity to default on the major part of its sovereign debt by simply changing Greek law. And it could do so without having to fear that its external creditors could use the American and British courts to shut Greece out of the international capital market as they were so successful doing in the Argentine case.

Desmond Lachman is a resident fellow at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman

What's new on AEI

Obama should channel Reagan on Russia
image Tackling our nation’s budget problems, head on
image Missing the point on inversions and corporate taxes
image Venezuela betrayed — missed chance to expose regime
AEI on Facebook
Events Calendar
  • 28
    MON
  • 29
    TUE
  • 30
    WED
  • 31
    THU
  • 01
    FRI
Tuesday, July 29, 2014 | 10:00 a.m. – 12:00 p.m.
Is Medicare's future secure? The 2014 Trustees Report

Please join AEI as the chief actuary for Medicare summarizes the report’s results, followed by a panel discussion of what those spending trends are likely to mean for seniors, taxpayers, the health industry, and federal policy.

Friday, August 01, 2014 | 10:30 a.m. – 12:00 p.m.
Watergate revisited: The reforms and the reality, 40 years later

Please join us as four of Washington’s most distinguished political observers will revisit the Watergate hearings and discuss reforms that followed.

No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.