Devalue, deflate, inflate or default

David Brancaccio Jan 13, 2012

Just when things were starting to look up in Europe, Standard & Poors announced credit ratings downgrades for several European countries, including France and Austria (from AAA to AA+), as well as Italy, Spain and Portugal. S&P left Germany unchanged, but it was a still a blow to the struggling eurozone.

Even more troubling was news that Greek officials ended negotiations on a debt swap with private creditors without reaching an agreement. This could put Greece on the path to default.

Mark Blyth teaches political economy at Brown University. In situations like this, he says, Greece has four ways out of its crisis: devalue, deflate, inflate or default. Blyth says the Greeks can’t devalue because they are in the euro. “They’ve been trying to deflate their way to prosperity, and that hasn’t been working. They can’t invest. So they’re left with default as the only option.”

If Greece can’t restructure its debt, it could be bankrupt by late March and default on its 14.4 billion euro debt.

Blyth says Greece technically has another couple of months to negotiate, so the failure to reach agreement today is “more a game of brinksmanship, as they want to get more reductions in the amount they owe to the private sector.” It could mean today was a warning shot across the bow rather than boarding and sinking the ship.

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