It looks like Greece will be able to stave off a meltdown for now, as the government won a vote of confidence Tuesday. But ultimately, the country will default on its debt, says Harvard economist Martin Feldstein.
“With a debt to gross domestic product ratio of more than 150 percent, large annual deficits and interest rates of more than 25 percent, the only question is when the default will occur,” Feldstein writes in the Financial Times. “The current negotiations are really about postponing the inevitable default.”
But letting Greece default now could push the crisis into Portugal, Ireland and possibly Spain, says the former chairman of President Ronald Reagan’s Council of Economic Advisors. And that could end in a collapse of major European banks.
“This inevitable contagion and its potential consequences for the European financial system is the reason the European Central Bank is determined to avoid a default at this time,” Feldstein writes.
“The challenge, therefore, is to find a way to postpone the defaults long enough for the banks and other creditors to withstand the write-downs of bond values if Greece, Portugal, and Ireland default simultaneously.”
Now that Greece’s Prime Minister George Papandreou has won parliament’s vote of confidence, “the question that’s still lingering is the old cage match between the ECB and Germany, and who’s going to give and how much,” Ilan Solot, a currency strategist at Brown Brothers Harriman, tells Bloomberg.
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