Nouriel Roubini: Greece Should Default and Abandon the Euro

[Better Believe It]

Greece Should Default and Abandon the Euro
By Nouriel Roubini
September 16, 2011

Greece is insolvent, uncompetitive and stuck in an ever-deepening depression, exacerbated by harsh and excessive fiscal consolidation. It is time for the country to default in an orderly manner on its public debt, exit the eurozone (EZ) and return to the drachma to rapidly restore solvency, competitiveness and growth.

Exit will require a conversion of euro liabilities into the new currency to limit the balance sheet effects that the depreciation of the new national currency will entail.

Greece can exit the monetary union in an orderly and negotiated manner (i.e. limit the collateral damage to its own economy and financial markets that this exit would imply) if orderly mechanisms are used and appropriate official finance is provided. Such official finance to Greece and other EZ members under stress will limit the contagion and the losses for other periphery and core creditor countries, and will ensure that the domestic Greek financial system and economy does not suffer a chaotic implosion.

Default and exit will be painful and costly, but the alternative of a decade-long deflation and depression would be much worse, economically, financially and socially. Moreover, there are historical precedents for countries successfully taking the route of an orderly default on unsustainable foreign liabilities and exit from unsustainable currency pegs and/or currency boards.

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