What Happens If Greece Defaults On Its Debts?

Robert Siegel speaks with Martin Wolf, chief economics commentator for the Financial Times. Wolf talks about what would happen if Greece defaulted on its debts.

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ROBERT SIEGEL, host:

Now to financial matters in Europe. The debt crisis is not going away. Greece, Portugal and Ireland, all overwhelmed by debt and budget deficit, have been beneficiaries of big bailouts by the European Union. The problem is the bailouts don't appear to be working.

Martin Wolf, chief economics commentator for the Financial Times, says the situation in Greece is especially dire, and that's after a big infusion of money in exchange for big spending cuts.

Dr. MARTIN WOLF (Chief Economics Commentator, Financial Times): It is now pretty obvious that unless something quite astonishing happens - I'm seeing no chance of it - that Greece is going to need more money to finance its ongoing deficit, maybe 30 billion euros or so, which will have to be met by governments if Greece is not to default.

SIEGEL: What exactly was wrong with the deal that was worked out for Greece? Was it not big enough? Was it too rosy in its expectation of how Greece would recover economically? Why isn't it working?

Dr. WOLF: Both. It was too rosy in its assumptions of the ease with which Greece would recover and survive, as it were, while having huge fiscal cuts. The second problem that people didn't - well, they sort of realized but they were hoping for the best - is the politics of delivering on all this is very, very hard.

But the third reason is perhaps the most important, which is that confidence having fled, and confidence in Greece has fled in the private markets, it always takes a long time for private investors to start taking sort of a risk again. And it's almost impossible when you've got a country like Greece whose debt is already so colossal. I mean, we are looking at a country whose gross debt, public debt to GDP by 2012, is going to be in the neighborhood of 160 percent.

SIEGEL: And is Greece unique in that regard or would Portugal and Ireland be in pretty much the same situation?

Dr. WOLF: My own personal view is that there is a reasonable chance that Ireland will manage this. Portugal is a much more difficult case.

SIEGEL: Well, let's deal then with Greece. If, indeed, there is some recognition that the Greeks cannot pull out of their problems under the current arrangements, does such an agreement have consequences beyond the borders of Greece? That is, does it affect the rest of Europe? Does it affect the dollar? Who has a stake in this beyond the Greeks and, say, the French and the Germans?

Dr. WOLF: There's no doubt that that would have repercussions on other countries because the private sector would realize that there are real risks in lending to countries which don't have absolutely rock solid credit. This will also affect the banking systems around Europe, which are very vulnerable. And once, if it were to become a banking crisis again, which is the worst nightmare, then almost inevitably it would affect the U.S. too.

SIEGEL: But just to explain. The reason for fearing a banking crisis here is that just as at one time banks were sitting on a lot of securities backed by and bad mortgages, in this case if they're sitting on a lot of securities backed by improvident countries, they would have to acknowledge losses and...

Dr. WOLF: Exactly. It will be in another round of bad debt that would, in a very interconnected financial system, have some global repercussions.

SIEGEL: Just one other question, this brings together both tragedy and farce here. Are the people who are sitting around the table negotiating these problems, is there the will to solve them? Do they see the issue clearly and do they have the political strength to do it? And does the situation of Dominique Strauss-Kahn somehow make any difference in the likelihood of actually negotiating a successful resolution here?

Dr. WOLF: On the latter point, I can't comment at all on the case, which is horrifying in all its respects. But he was, without any doubt, a remarkable head of the IMF and I can't see anyone who can take his place. The difficulty in terms of making this work is you have all these countries, and essentially the creditor countries - which simply don't want to help these countries that have got into debt - at the same time, there are a lot of countries in Europe who are, as it were, on the borderline; whose view is essentially we must never under any circumstances contemplate a default.

Because as soon as you set any defaults, it's just horrendous what this could do to you. And finally, there's the European Central Bank, which has its own very strong view that banks mustn't be allowed to default to their senior creditors, and governments must not default. And the European Central Bank has itself lent an enormous amount of money to keep these banks liquid.

So bringing this to coordination is extremely hard. And the question is, do the Europeans have the political will to do that? And I must say at the moment that's very, very unclear.

SIEGEL: Martin Wolf, thank you very much for talking with us once again.

Dr. WOLF: It's a pleasure.

SIEGEL: Martin Wolf, the chief economics commentator for the Financial Times, spoke to us from London.

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