What is Papandreou So Afraid Of?

I recently posted this on the Linkedin discussion forum 'Friends of Greece', a very active board that I recommend all Hellenes on Linkedin join.

'What happens if Greece just refuses to pay anything... No principle or interest? All I have heard is a presumptive "we MUST take this deal" by Papandreaou and other government officials...even as a child I was taught to ask the question...if we don't what will happen?'

Below is the closest there has been to any kind of response...and if that is the case then all Greeks would be infinitely better off defaulting or restructuring except for a few of the really rich:

"This is a time of responsibility for all, for social cohesion, for safety, and for democracy," he said.

Despite the violence and mass protest, Papandreou defended Greece's decision to seek aid and move ahead with the austerity and reform measures, saying the country had no other choice.

"The government understand the feelings of the pensioners who have had their pensions cut, of the workers who have had their incomes cut," he said. "But we did it to secure a future, which we would not have had without it."

"The other option was that the country would have become bankrupt, and in turn all of the Greek population would have become bankrupt," he added.'

Papandreou claims there is no other choice

So bankruptcy is just 'bad', without a coherent explanation as to why a debt-ridden country with a debt-ridden population should accept a punitive 'bailout' package without even minimal restructuring, which will only put off the inevitable for a few years of interest payments. On the other hand, here is an excerpt from an article outlining various sovereign defaults throughout recent history:

'For Greece, the prospect of default is naturally tied to other countries in the Eurozone. They are rightly worried that a default by Greece would destabilize the euro and countries like Portugal, Italy, Spain and Ireland.

While strong support was confirmed by the €110-billion emergency loan, Mr. Peijan thinks a debt restructuring could still be necessary at a later date. This is because austerity measures increase the population’s resistance over time. The willingness of the IMF and European Union to provide potentially necessary follow-up financing may also decline.

“In this case, the contagion argument would speak for a relatively high recovery value and for political pressure on Greece to offer rather favourable terms,” the strategist said. “Then, investors might be more willing to assume that this example is followed by other European sovereigns, which would reduce the pressure on these markets.”

If Greece is willing to offer relatively high recovery values to rebuild some of the political capital lost due to its incorrect debt statistics for years, Mr. Peijan expects recovery levels could be above historical averages of 50%.

However, it is important to note that Greece’s debt-to-GDP ratio of approximately 115% is well above the average for defaulters. An average recovery value of 50% left countries with a debt level of 35%. Applying that target to Greece would leave recovery at 30%.

“While this would bring Greece in more favourable starting position, it would put even more pressure on Portugal, Spain and Italy as their relative position would become worse and put their stained economies under additional pressure,” the strategist said. “Therefore, such a low recovery value might not be politically opportune.”'

Soveriegn Defaults 101

In short, based on an analysis of the recovery prospects of defaulted countries, Greece would be in a far better position should a default occur, but the country is expected to 'take its medicine' so that the rest of the PIIGs don't lose investor confidence and follow suit. How generous of Papandreou to value the rest of the EU so highly...more highly even than he apparently does his own people.

And my follow-up question to Papandreou, as Greece votes on the bailout and further unrest looms, is this: is it not the job of a democratic leader to do the will of his people?