Wednesday, April 20, 2011

Greek Restructuring -- Sooner or Later?

It is interesting to see folks saying that if the Greeks restructure their debt (meaning a partial default on their debt) that a financial Armageddon will soon follow. Since restructuring or some type of default is inevitable for Greece, I guess there must be a financial Armageddon in our future. Last week the IMF suggested that the Greeks must restructure within 12 months and now more voices have been added saying essentially the same.

What those who worry about the coming Armageddon don't seem to get is that "restructuring" or a "partial default" is inevitable for Greece, Ireland, Portugal, Italy, and Spain. Indeed, one should add Germany and France to that list since their governments and banks have backstopped the former countries with bailouts in the past 24 months.

What is wrong with a default or partial default by Greece? Nothing. Those who have made bad loans to Greece should lose money. Is there any reason that they should be insulated from their bad decisions and the losses should be spread to those who did not make bad decisions? That's the problem with bailouts. They transfer wealth from those who made good decisions to those who made bad decisions. Why is that a good (or fair) idea? The answer is: it isn't.

Lending money to people who can't possibly pay it back is stupid and will eventually result in loss. Call it financial Armageddon or whatever you will. It is inevitable. The Western European plains are soon to be littered with defaults, partial defaults and restructurings. There is no way to avoid it. You may as well plan for it.