Do Greek Protesters Want a Default? Should They?
One possibility is that they believe the Greek government could continue its current policies if it wanted to, that the austerity program is merely a plot by wicked people to make the protesters, and people like them, worse off. It is hard to see how a government can continue to spend much more than it takes in if nobody is willing to lend it money, but that may not be how they are looking at the question.
An alternative possibility is that they realize that rejection of the program will result in their government being unable to either borrow more money or turn over its present debts, leading to a sovereign default, and are in favor of it. That raises two questions. The first is whether that is what the protesters, or many of them, want. Readers who have followed the situation more closely than I have are invited to offer any relevant evidence.
The second is whether, in terms of their own self-interest, it is what they ought to want. At first glance, one would think not. The program being proposed is not austere enough to put the Greek budget into surplus; under it the government would still be spending more money than it takes in, although not as much more. If defaulting on its present debt makes the Greek government unable to borrow, that would force a balanced budget and presumably lower, not higher, expenditures than currently proposed—the opposite of what the protesters want.
But the answer is not that clear. For one thing, current budget calculations include interest payment on the current debt; defaulting on that debt would eliminate those payments. I don not know the details of the proposed budget, but it is at least possible that a balanced budget with current income and without interest payments would result in an increase in (non-interest) expenditure.
Furthermore, default will not make borrowing impossible. My friend Jeff Hummel quotes me as saying—when and where I don't know—that sovereign default is the one balanced budget amendment with teeth. I do not know if I really said it, but if so I was exaggerating. Defaulting once is bad for one's credit rating, but defaulting twice is worse, so after a sovereign default a government still has some incentive not to do it again, hence some reason to pay off on any further borrowing. And the first default reduces the incentive for the second, since there is no wless debt to default on—the benefit of eliminating a billion dollar debt is much less than the benefit of eliminating a hundred billion dollar debt. So after default, a government should still have some ability to borrow.
Which raises the question of whether a Greek government that had defaulted would be willing and able to spend more money, some of it taxed and some of it borrowed, than currently proposed. If so, perhaps the protesters are correct in believing that rejecting of proposed program would lead to a better result, from their standpoint, than accepting it.
This is not only a post about Greece. The argument in favor of sovereign default applies to a lot of other governments as well, including the U.S. I find the rarity of such defaults—and the willingness of people to lend large amounts of money to borrowers who face no legal penalties if they fail to pay it back—at least mildly puzzling. Presumably the explanation lies in indirect costs to default, reputational and otherwise.
One further point is worth making, emphasized by the Greek situation—the existence of positive feedback. The greater the perceived risk of default, the higher the risk premium that lenders will require on their loans. The higher the risk premium, the more costly the debt, hence the greater the incentive to default. So if a sovereign default does happen, it could be surprisingly sudden.