Even though the Greek parliament has given the government some breathing space with its vote of confidence late on Tuesday, a default by Greece is inevitable. With a debt to gross domestic product ratio of more than 150 per cent, large annual deficits and interest rates of more than 25 per cent, the only question is when the default will occur. The current negotiations are really about postponing the inevitable default.
If Greece were the only insolvent European country it would be best if its default occurred now. Cutting its debt in half and replacing the existing debt with low interest rate bonds would allow Athens to service its obligations without the excruciating pain that would otherwise be involved.
But a default by Greece could trigger defaults by Portugal, Ireland and possibly Spain. The resulting losses would destroy the capital of banks and creditors in other countries. There would be a drying up of credit available to businesses throughout Europe and there could be a collapse of European banks.