Lessons from Greece

Over the past 4 years, I’ve been questioning the conventional wisdom that Greece’s debts were unpayable. In May 2017, after a sharp decline in Greek bond yields, I did a post at Econlog entitled:

Is the Greek public debt actually “unpayable”?

At the time, yields on Greek 10-year bonds had plunged to 7.4%. Today they are down below 3.3%:

Who knows, Greek bond yields might eventually fall below the yield on US Treasury bonds.

My argument was not that Greece was not at some risk of defaulting, rather that their national debt (roughly 180% of GDP) was certainly not “unpayable”. Whether bondholders actually got paid depended on whether the Greek public was willing to service the debt, or (as in 2012) whether they were unwilling to do so. Today it looks like the Greeks have stepped up to the plate and the public debt looks sustainable. Of course if there were another deep recession then things could change fast.

Bloomberg has a new piece pointing to lots of incorrect predictions from back in 2015:

Greece reached its bailout deal with European creditors in the summer of 2015 after some of the smartest people earlier that year predicted default and exit from the European Monetary Union.

Former U.S. Federal Reserve Chairman Alan Greenspan told the British Broadcasting Corp. then that it was “just a matter of time” before Greece abandoned the shared currency and the euro disintegrated. George Soros, the billionaire chairman of Soros Fund Management, said in an interview with Bloomberg Television a month later that “Greece is going down the drain.” Marcel Fratzcher, the Oxford- and Harvard-educated former head of policy analysis at the European Central Bank and president of the German Institute for Economic Research, went so far as to characterize Greece as a “political and economic catastrophe.” Amid predictions that Greece would abandon the euro and revert to the drachma in a desperate ploy to reassert control over its economic future, Fratzcher declared: “A Grexit is and remains the worst option for Greece. It is becoming more and more likely.”

There’s no shame in these false predictions, indeed I was not at all certain what Greece would end up doing. My point here is that it’s dangerous to predict economic crises. If the crisis were fairly certain to occur, it likely would have already happened. You can certainly observe that a given situation is very precarious, just as one might notice that a certain mountain road is susceptible to accidents. But just as it is difficult to predict that a specific auto will crash, it’s hard to predict which countries will default on their debt.

PS. Technically those predictions cited by Bloomberg were about leaving the euro. But a Grexit would have made default on Greek euro-denominated public debt virtually 100% certain. Indeed, claims that the Greek debt was unpayable continued long after 2015.

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