Greece really only has one option to end its Greek tragedy for good, suggests Stephen Moore, distinguished visiting fellow at The Heritage Foundation.
Moore calls it the “Detroit option” — he urges Greece to go bankrupt.
“Then let this once-rich nation, hit the restart button to rebuild its economy,” he writes in The Washington Times.
Greece headed into an uncertain future in Europe's common currency after voters overwhelmingly rejected demands by international creditors for more austerity measures in exchange for a bailout of its bankrupt economy, the Associated Press reported.
Results showed about 61 percent voted "no," compared with 39 percent for "yes," with 100 percent of the vote counted. The referendum — Greece's first in more than four decades — came amid severe restrictions on financial transactions in the country, imposed last week to stem a bank run that accelerated after the vote was called.
Sunday's vote was held after a week of capital controls imposed to halt a bank run, with Greeks restricted to a daily cash withdrawal maximum of 60 euros ($67).
Long lines have formed at ATMs, while pensioners without bank cards have thronged the few bank branches opened to allow them access to a maximum 120 euros for the week. Queues at ATMs swelled again as the initial results of the referendum came in.
But Moore says a solution is relatively simple. “Put Greece under receivership and let these new authorities figure out how to manage the debt and decide who will take a haircut and how big. Pensioners, bondholders, welfare recipients, government workers, the International Monetary Fund, all will have to settle for less — maybe a lot less," he said.
"It’s tough love, but it’s the only way out. More bailouts and debt extensions will only delay the crash of the socialist Greek economy,” he wrote.
Greece has been struggling with an economy in a lingering recession, with high unemployment and banks dangerously low on capital.
The international bailout — under which it received nearly 240 billion euros in rescue loans — expired last week, on the same day Greece defaulted on an IMF repayment, becoming the first developed nation to do so.
Of critical importance will be whether the European Central Bank decides to maintain its lifeline to Greece in the form of emergency liquidity assistance, or ELA. The assistance, now at around 90 billion euros, has been maintained but not increased in past days, leaving the country's financial system in a stranglehold.
Moore called for a technical default on Greece’s debt. (The nation is already in default on more than $1 billion in IMF loans.)
“This will force a debt restructuring. Creditors may get 50 cents on the dollar owed, depending on how bleak the finances really are in Athens. Welfare benefits will have to be slashed. Pensions for retirees will be cut based on the new reality of Greece’s finances. This may seem 'unfair,' but how is it fair to require young Greek citizens to bear exorbitant taxes to pay for the sins of their fathers and grandfathers?” he asked.
“When Detroit filed for bankruptcy, it allowed the Motor City to, in effect, start over economically. The city is financially cut off from much borrowing. Government workers have been laid off. Benefits have finally been trimmed. And guess what? Detroit is making a comeback. Real estate values are rising. Construction is beginning again. In a decade, Detroit could be a financially sound and desirable place to live and do business,” he wrote.
“Meanwhile, the Greek citizens have come to the conclusion that fat pensions and cradle-to-grave welfare benefits are a human right that can never be taken away. Maybe the politicians never will. But a bankruptcy court could and probably would,” Moore wrote.
“All of the conventional EU and IMF solutions sidestep the root cause of the Greek tragicomedy. The Greek citizens are simply living way, way beyond their means. This is a nation with an average retirement age of 60. This is a nation that has one in four adults unemployed and half of its young people out of work,” he wrote.
Will a Greek bankruptcy cause a global financial panic?
“Not if it is carried off in an orderly and open fashion,” Moore wrote. “One implication of this solution is that investors may start to view sovereign debt as risky, not risk-free. They will charge nations — especially those that have massive unfunded liabilities — higher interest rates. Making it harder for bloated governments to borrow would be a positive development. More money would flow to private-sector borrowing and less to governments,” he wrote.
Many other financial experts are calling for such tough love and harsh financial medicine for Greece.
Marc Faber, editor of The Gloom, Boom & Doom Report, told the Anadolu Agency
that Greece should be booted out of the euro currency.
"Greece is an irrelevant country in global economy. It’s less than 2 percent of global GDP. Economically it has no impact,” he said, but added the Greek crisis probably will disrupt the global financial system.
“If such a small country can have such a huge impact on the financial system, it means the financial system is very fragile. That’s the problem in my view," he said.
"I think leaving the euro zone and printing Drachma would be the best option, going back to the local currency. At that stage of course there will be meaningful devaluation. But a lot of money is waiting to go to Greece. A lot of hedge funds want to buy Greek assets. In my view that would be the best measure,” he said.
“Under these conditions I think the Greek economy can perform well. This is the fear of ECB and the bureaucrats in Brussels, if Greece leaves suddenly their economy will do well and then other countries Italy, Portugal, Spain…they will also see ‘oh they left the zone and now they are performing well’ …then they will do the same."
(The Associated Press and Newsmax Wire Services contributed to this report).
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