Greece

[Dave Backus @ NYU]

Nice piece in the WSJ today by Cochrane and Kashyap. I esp like this
line: "Keep in mind, Greece is not being bailed out. Greece's
bondholders are being bailed out. Greece would rather default."

Right! The difficulty here is that it's not as clear what default is
with countries as it is with companies. If a company defaults, the
creditors get the company and its assets.

There are two related issues here. One is that countries can choose
to default. Companies don't do this because, well, they lose the
company if they do. With government debt, you wonder whether an
opportunistic politician might simple decide to default, because life
is easier if you can ignore those pesky debts. We've certainly seen
that in the past. In Greece the debts are large enough that it's hard
to see them ever paying them off, so the question is how we manage
default. Which brings up the second issue: what does default look
like for a government? Governments do what they want, that's why we
call them "sovereign." Creditors can't claim the assets, they have a
claim on whatever the government decides to give them. In this
respect, government debt is fundamentally different from private
debt. That's always been the case, but every decade or so we relearn
the lesson.

Cochrane and Kashyap, however, point us back to the creditors: What
were they thinking when they bought the bonds? (Returns looked
good!) Why should we bail them out? Why has the ECB continued to
accept Greek debt as collateral? It's bad form to say this, but it's
tremendously interesting for economists to see how all this plays
out.

Link
http://online.wsj.com/article/SB10001424052702304186404576389542793496526.html?mod=WSJ_Opinion_LEADTop