Prior to Argentina’s 2001 exit from the Convertibility Plan, markets thought that the IMF and the US Treasury would never allow that to happen

Is a Greek exit from the euro really impossible?

Desmond Lachman

Conventional market wisdom has it that Greece passed its test of fire last year and that Greece’s European partners will simply not let Greece exit the euro. This conventional wisdom, which has been reflected in a marked decline in Greek government long-term bond yields to barely 8 ½%, is all too reminiscent of the conventional wisdom about Argentina’s commitment to its currency peg in the months immediately preceding that country’s ignominious exit from its Convertibility Plan in December 2001. Sadly, in the months ahead, the current conventional wisdom about Greece never abandoning the euro is likely to be sorely tested as Greece’s political and economic conditions continue to deteriorate.

Anesthetized by ample global liquidity, markets are simply choosing to ignore many warning signals emanating out of Greece about that country’s troubled political and economic future. They certainly seem to be turning a blind eye to the current Greek government’s insistence that Greece has reached the social and political limits as to how much more budget austerity and painful structural economic reform the country can tolerate. They also seem to be turning a blind eye to Greece’s stalled IMF negotiations and to increased signs that patience is running out in Berlin about Greek foot dragging on real economic reform.

......................





Read more: www.aei-ideas.org