Saturday, May 28, 2011

Greece can derail the world economy

Last May, after the IMF-EU rescue of Greece, I confidently forecast that the rescue would not work. There was no way Greece could service its then level of debt. A year later, it's being generally accepted that restructuring is necessary although the EU appears to favour 'soft restructuring', which is extending the maturities of debt instead of debt forgiveness or lowering of interest rates. This, of course, merely postpones the day of reckoning.

My forecast may have come true but I am not celebrating. The Greek debt problem is a lot worse than thought earlier. It appears now that even restructuring will not return Greece to insolvency. That leaves only two options: a fiscal union for the EU (with fiscal transfers from a 'centre' to the states, as in India) or the exit of Greece from the currency union. The first is politically distasteful; the second will create turmoil all round. Greece will be quite a nut for the new head of the IMF to crack.

More in my ET column, Greek jolt to world economy.

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