Tags: Feldstein | Greece | Default | Orderly

Martin Feldstein: Greece Should Default in an Orderly Way

Thursday, 29 Sep 2011 08:04 AM

Greece needs to default on its debts in an organized way to end the crisis rocking the economy there and threatening the stability of the European economy, says Harvard economist Martin Feldstein.

"The only way out is for Greece to default on its sovereign debt. When it does, it must write down the principal value of that debt by at least 50 percent," Feldstein writes in a Project Syndicate piece.

Banks in bigger European countries like Germany and France own Greek debt, and a default would mean those institutions would take a haircut on their holdings.

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Martin Feldstein
(Getty Images photo)
Should Greece default down the road, other countries carrying hefty debt burdens like Spain and Italy would experience financial meltdown, thus exacerbating the problem.

If Europe can keep Greece afloat for two years, in which time Spain and Italy get their economic houses in order, then European leaders could allow Greece to default without fear of dangerous contagion, Feldstein says.

If they can't get it together in two years, then they could default as well.

European and International Monetary Fund authorities are working to keep Greece in the eurozone as long as they can for banks across the continent to get ready for a possible Greek default, but Feldstein says they might not have time.

"The level of Greek interest rates shows that markets believe that Greece will default very soon. And even before that default occurs, interest rates on Spanish or Italian debt could rise sharply, putting these countries on a financially impossible path. The eurozone’s politicians may learn the hard way that trying to fool markets is a dangerous strategy."

Greece's debt woes have fueled wild swings in global stock markets, even in the United States.

"Think of Europe as a hospital patient," David Sowerby, a Bloomfield Hills, Michigan-based portfolio manager at Loomis Sayles & Co., which oversees $150 billion, tells Bloomberg.

"There are lots of doctors in the room, but no clear-cut remedy."

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Greece needs to default on its debts in an organized way to end the crisis rocking the economy there and threatening the stability of the European economy, says Harvard economist Martin Feldstein. The only way out is for Greece to default on its sovereign debt. When it...
Feldstein,Greece,Default,Orderly
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2011-04-29
Thursday, 29 Sep 2011 08:04 AM
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