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.