Athens Is Burning

While we watch scenes of street protesters lobbing molotov cocktails at riot police, one begins to wonder how did the world ever imagine that the Greeks would go along with the proposed austerity measures?

Apparently, it was the perception of many, including former Goldman Sachs CEO and Governor of New Jersey, John Corzine, that the wealthy members would bail out the weaker members of the Euro zone.

However, they obviously forgot that European nationals have a long, storied history of disdain for one another, so the idea that they could come together in a caring, sympathetic way to aid a struggling member of their currency union was naive from the start, nor do I think it is a good idea in any event.

The European Union is, above all, a currency union designed to remove currency cost from cross-border transactions, and to aid in payment clearing by a centralized bank.  The EU does not have the kind of authority or control at the Parliamentary level to ensure that member states adhere to fiscally conservative guidelines; the "solution" put forth by France and Germany (major salary cuts, benefits cuts, etc.) is, at best, a suggestion and has no teeth whatsoever.  The only thing that the European Central Bank can do is to stop buying Greek government debt, which will force the default that the austerity proposals are designed to avoid.

Therefore, I view Greek default to be inevitable.  Who suffers the most in the case of Greek default?  Those with significant exposure to Greek sovereign debt, of course, but Greek debt is a drop in the bucket for many  of these creditors, and the IMF and European Central Bank may come to their aid to preserve a portion of their principal in any event.  Of course, the Greeks are headed for a rude awakening when they have trouble borrowing to meet their huge budget shortfall and see the value to their newly minted drakma deposits diminish by 1/3 or more relative to their previous euro valuation.

However, a Greek default will be the best solution for all concerned.  It will put an end to Greece's debt-fueled binge.  In the end the Greeks will benefit in that they can begin putting their fiscal house in order and the investors in Euro Zone debt can finally be disabused of the notion that European sovereign debt is somehow more valuable if the party to the debt is a member of the European Union.