The Greek government needs to escape from an otherwise impossible situation.
It has an unmanageable level of government debt (150 per cent of GDP, rising this year by 10 percentage points), a collapsing economy (with GDP down by more than 7 per cent this year, pushing the unemployment rate up to 16 per cent), a chronic balance-of-payments deficit (now at 8 per cent of GDP), and insolvent banks that are rapidly losing deposits.
The only way out is for Greece to default on its sovereign debt.
When it does, it must write down the principal value of that debt by at least 50 per cent. The current plan to reduce the present value of privately held bonds by 20 per cent is just a first small step toward this outcome.
If Greece leaves the euro after it defaults, it can devalue its new currency, thereby stimulating demand and shifting eventually to a trade surplus.
Such a strategy of "default and devalue" has been standard fare for countries in other parts of the world when they were faced with unmanageably large government debt and a chronic current-account deficit. It has not happened in Greece only because the country is trapped in the single currency.
The markets are fully aware that Greece, being insolvent, will eventually default. That is why the interest rate on Greek three-year government debt has soared past 100 per cent and the yield on 10-year bonds is 22 per cent, implying that a €100 (Dh500) principal payable in 10 years is worth less than €14 today.
Why, then, are political leaders in France and Germany trying so hard to prevent - or, more accurately, to postpone - the inevitable? There are two reasons.
First, the banks and other financial institutions in Germany and France have large exposures to Greek government debt, both directly and through the credit they have extended to Greek and other euro-zone banks.
Postponing a default gives the French and German financial institutions time to build up their capital, reduce their exposure to Greek banks by not renewing credit when loans come due, and sell Greek bonds to the European Central Bank.
The second, and more important, reason for the Franco-German struggle to postpone a Greek default is the risk that such a default would induce sovereign defaults in other countries and runs on other banking systems, particularly in Spain and Italy. This risk was highlighted by Standard & Poor's downgrading of Italy's credit rating.
A default by either of those large countries would have disastrous implications for the banks and other financial institutions in France and Germany.
The European Financial Stability Fund is large enough to cover Greece's financing needs but not large enough to finance Italy and Spain if they lose access to private markets. So European politicians hope that by showing that even Greece can avoid default, private markets will gain enough confidence in the viability of Italy and Spain to continue lending to their governments at reasonable rates and financing their banks.
If Greece is allowed to default in the coming weeks, financial markets will indeed regard defaults by Spain and Italy as much more likely. That could cause their interest rates to soar and their national debts to rise rapidly, thus making them effectively insolvent. By postponing a Greek default for two years, Europe's politicians hope to give Spain and Italy time to prove they are financially viable.
Two years could allow markets to see whether Spain's banks can handle the decline of local property prices, or whether mortgage defaults will lead to widespread bank failures, requiring the Spanish government to finance large deposit guarantees.
The next two years would also disclose the financial conditions of Spain's regional governments, which have incurred debts that are ultimately guaranteed by the central government.
Likewise, two years could provide time for Italy to demonstrate whether it can achieve a balanced budget.
Silvio Berlusconi's government has passed a budget bill designed to raise tax revenue and to bring the economy to a balanced budget by 2013. That will be hard to achieve because fiscal tightening will reduce Italian GDP, which is now barely growing, in turn shrinking tax revenue.
So, in two years, we can expect a debate about whether budget balance has then been achieved on a cyclically adjusted basis. Those two years would also indicate whether Italian banks are in better shape than many now fear.
If Spain and Italy do look sound enough at the end of two years, European political leaders can allow Greece to default without fear of dangerous contagion. Portugal might follow Greece in a sovereign default and in leaving the euro zone. But the larger countries would be able to fund themselves at reasonable interest rates, and the current euro-zone system could continue.
If, however, Spain or Italy does not persuade markets over the next two years that they are financially sound, interest rates for their governments and banks will rise sharply, and it will be clear that they are insolvent. At that point, they will default. They would also be at least temporarily unable to borrow and would be strongly tempted to leave the single currency.
But there is a greater and more immediate danger. Even if Spain and Italy are fundamentally sound, there may not be two years to find out.
The level of Greek interest rates shows that markets believe Greece will default very soon. And even before that default occurs, interest rates on Spanish or Italian debt could rise sharply, putting these countries on a financially impossible path. The euro-zone's politicians may learn the hard way that trying to fool markets is a dangerous strategy.
Martin Feldstein, professor of economics at Harvard, was chairman of US president Ronald Reagan's Council of Economic Advisers and is a former president of the National Bureau of Economic Research
* Project Syndicate
COMPANY%20PROFILE
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Seven tips from Emirates NBD
1. Never respond to e-mails, calls or messages asking for account, card or internet banking details
2. Never store a card PIN (personal identification number) in your mobile or in your wallet
3. Ensure online shopping websites are secure and verified before providing card details
4. Change passwords periodically as a precautionary measure
5. Never share authentication data such as passwords, card PINs and OTPs (one-time passwords) with third parties
6. Track bank notifications regarding transaction discrepancies
7. Report lost or stolen debit and credit cards immediately
Women%E2%80%99s%20T20%20World%20Cup%20Qualifier
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APPLE IPAD MINI (A17 PRO)
Display: 21cm Liquid Retina Display, 2266 x 1488, 326ppi, 500 nits
Chip: Apple A17 Pro, 6-core CPU, 5-core GPU, 16-core Neural Engine
Storage: 128/256/512GB
Main camera: 12MP wide, f/1.8, digital zoom up to 5x, Smart HDR 4
Front camera: 12MP ultra-wide, f/2.4, Smart HDR 4, full-HD @ 25/30/60fps
Biometrics: Touch ID, Face ID
Colours: Blue, purple, space grey, starlight
In the box: iPad mini, USB-C cable, 20W USB-C power adapter
Price: From Dh2,099
How to protect yourself when air quality drops
Install an air filter in your home.
Close your windows and turn on the AC.
Shower or bath after being outside.
Wear a face mask.
Stay indoors when conditions are particularly poor.
If driving, turn your engine off when stationary.
Moon Music
Artist: Coldplay
Label: Parlophone/Atlantic
Number of tracks: 10
Rating: 3/5
COMPANY PROFILE
Founders: Alhaan Ahmed, Alyina Ahmed and Maximo Tettamanzi
Total funding: Self funded
COMPANY PROFILE
Name: HyperSpace
Started: 2020
Founders: Alexander Heller, Rama Allen and Desi Gonzalez
Based: Dubai, UAE
Sector: Entertainment
Number of staff: 210
Investment raised: $75 million from investors including Galaxy Interactive, Riyadh Season, Sega Ventures and Apis Venture Partners
Company%20Profile
%3Cp%3E%3Cstrong%3ECompany%20name%3A%20%3C%2Fstrong%3ENamara%0D%3Cbr%3E%3Cstrong%3EStarted%3A%20%3C%2Fstrong%3EJune%202022%0D%3Cbr%3E%3Cstrong%3EFounder%3A%20%3C%2Fstrong%3EMohammed%20Alnamara%0D%3Cbr%3E%3Cstrong%3EBased%3A%20%3C%2Fstrong%3EDubai%20%0D%3Cbr%3E%3Cstrong%3ESector%3A%20%3C%2Fstrong%3EMicrofinance%0D%3Cbr%3E%3Cstrong%3ECurrent%20number%20of%20staff%3A%20%3C%2Fstrong%3E16%0D%3Cbr%3E%3Cstrong%3EInvestment%20stage%3A%20%3C%2Fstrong%3ESeries%20A%0D%3Cbr%3E%3Cstrong%3EInvestors%3A%20%3C%2Fstrong%3EFamily%20offices%0D%3Cbr%3E%3C%2Fp%3E%0A
MATCH INFO
Barcelona 5 (Lenglet 2', Vidal 29', Messi 34', 75', Suarez 77')
Valladolid 1 (Kiko 15')
Meydan race card
6.30pm: Baniyas (PA) Group 2 Dh125,000 (Dirt) 1,400m
7.05pm: Maiden (TB) Dh165,000 (D) 1,200m
7.40pm: Maiden (TB) Dh165,000 (D) 1,400m
8.15pm: Handicap (TB) Dh170,000 (D) 1,900m
8.50pm: Rated Conditions (TB) Dh240,000 (D) 1,600m
9.25pm: Handicap (TB) Dh175,000 (D)1,200m
10pm: Handicap (TB) Dh165,000 (D) 1,400m
Company: Instabug
Founded: 2013
Based: Egypt, Cairo
Sector: IT
Employees: 100
Stage: Series A
Investors: Flat6Labs, Accel, Y Combinator and angel investors
The specs
Engine 60kwh FWD
Battery Rimac 120kwh Lithium Nickel Manganese Cobalt Oxide (LiNiMnCoO2) chemistry
Power 204hp Torque 360Nm
Price, base / as tested Dh174,500
More from Neighbourhood Watch:
Thank You for Banking with Us
Director: Laila Abbas
Starring: Yasmine Al Massri, Clara Khoury, Kamel El Basha, Ashraf Barhoum
Rating: 4/5
How to help
Send “thenational” to the following numbers or call the hotline on: 0502955999
2289 – Dh10
2252 – Dh 50
6025 – Dh20
6027 – Dh 100
6026 – Dh 200
'Fantastic Beasts: The Secrets of Dumbledore'
Rating: 3/5
Directed by: David Yates
Starring: Mads Mikkelson, Eddie Redmayne, Ezra Miller, Jude Law
COMPANY PROFILE
Name: Almnssa
Started: August 2020
Founder: Areej Selmi
Based: Gaza
Sectors: Internet, e-commerce
Investments: Grants/private funding
How does ToTok work?
The calling app is available to download on Google Play and Apple App Store
To successfully install ToTok, users are asked to enter their phone number and then create a nickname.
The app then gives users the option add their existing phone contacts, allowing them to immediately contact people also using the application by video or voice call or via message.
Users can also invite other contacts to download ToTok to allow them to make contact through the app.
Visit Abu Dhabi culinary team's top Emirati restaurants in Abu Dhabi
Yadoo’s House Restaurant & Cafe
For the karak and Yoodo's house platter with includes eggs, balaleet, khamir and chebab bread.
Golden Dallah
For the cappuccino, luqaimat and aseeda.
Al Mrzab Restaurant
For the shrimp murabian and Kuwaiti options including Kuwaiti machboos with kebab and spicy sauce.
Al Derwaza
For the fish hubul, regag bread, biryani and special seafood soup.