No more money will be made available to Greece in the third set of bail-out negotiations now under way. That is surely a clear message from several recent news announcements. The EU may make token concessions in order to propitiate Greek national pride, but – apart from new debt interest (which external creditors may be prepared to add to the stock of existing debt) – the Greek government is about to be told ‘no more money’.

Does that mean that Greece will abandon the euro and re-introduce the drachma?  I argue that the more likely outcome is that Greece keeps the euro as its legal tender and that its government finances itself on a hand-to-mouth basis, possibly for several years. I believe that several American states have done this in the past, but would need to check the history. Life goes on. Ultimately, in order to borrow again, the Greek government would have to run a surplus over an extended period and restore its creditworthiness that way. (I know this may be met by a belly-laugh. Well, look at what has happened to the external debts of the Mexican government over the last 30 years, or the Russian and Turkish governments in the last 15 years. Sound finance works, whatever Professors Krugman and Stiglitz say about the matter.)

A virtual Greek government default (i.e., a move to hand-to-mouth financing, with an understanding with external creditors about the interest rate on the debt, the schedule of future repayments, etc.) and retention of the euro seem to me of limited significance for either the world economy or international financial markets. ‘Grexit’ is another matter, but only because of the setting of precedents for the possible future exit of a larger Eurozone member from the system. Greece accounts for about 0.3% of world GDP and a high share of its external debt is now in official hands. (I am not saying, first, that everything is well in the Eurozone or, second, that the single European currency is a structure that would have been established in the best of all possible world or, third, that the German taxpayer will get out of this monstrosity scot-free. I am saying that that the amount of attention paid to this subject by financial markets in recent months has been out of all proportion to its true significance.)

By Prof.Tim Congdon Chief Executive, International Monetary Research Ltd

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