Why early sovereign default could save the euro | vox
This suggestion from economists Hau and Hege is right, but for the wrong reasons.
After all,debtor default and renegotiation is a natural and integral part of any banking business model, since a small percentage of the clients always need more tme to repay, if they can pay back at all, regardless of the client segment, households, corporates, other banks, or sovereigns.
Why the repayment capacity is very low, what is needed is effective debt reduction through debt write-downs, which should normally be taken by the original creditors which had lent too much. Instead, in the the current Eurozone debt crisis, the overextended private sector lenders have been taken out, mostly at par, by new debt from official sources, including the ECB and the Bundesbank (through TARGET2). Except for Greece, the overleveraged borrowers received pratically no net debt relief.
Hau and Hege argue that, with the bailout schemes, the excessive debt overhang problem of some countries has become the debt overhang problem of all the others, without any net relief for the Eurozone as a whole. This analysis ignores the intermediate step of substitution of individual private creditors by collective official creditors. The EFSF or the ESM have become liable for future losses precisely because they have taken out and "held harmless" the orignal foolish creditors.
In fact, this is the real reason that formal default and stand-still has been so studiously avoided, so that the protacted period of pseudo non-default could allow the shifting of credit exposure from bilateral creditors (ex. German, French, English and Dutch banks) to multilateral official creditors, such as the EFSF, the ESM and the ECB. Much of the cross-border credit exposures have been collectivized and mutualized.
If there has been any real bailout, it has helped mosty the original cross-border creditors, not the domestic investors, which will always have a disproportionate exposure to their own sovereigns.
When debt burdens become excessive, default and suspension of payments by the borrower are often necessary in order to force the creditors to the re-negotiating table, and to insure a fair sharing of the sacrifices between the foolish overleveraged borrower and its, equally foolish, overextended lenders.
After all, it takes a creditor to get a debtor into hock.
Mariana Abrantes de Sousa
See more about orderly defaults in this blog
and the Costs of Sovereign Default, http://www.voxeu.org/article/what-will-happen-if-greece-defaults-insights-theory-and-reality, which distinguishes between strategic and unavoidable defaults