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The Disorderly Default in Your Closet Eupdate

posted by Anna Gelpern

Another day, another Greek deal to end them all (more on that soon). Amid the political din, legal and financial complexity, one thing has struck me: the entire enterprise is being justified as a way to avoid "disorderly default." But what exactly is disorderly default--that scary monster in the closet keeping many Eurocrats, foreign bondholders, and Greeks awake at night--and is it really the sole unthinkable alternative to the mess of the past year and, perhaps, some years to come?

Disorderly default, one that comes as a surprise to the markets, leading to contagion, capital flight, bank runs, a crashing collapse of the Euro, and widespread litigation, is surely unappetizing. But the alternative to disorderly default might also be a priced-in default with minimal contagion, a contentious restructuring with lots of litigation, or a slow-bleed near-default, complete with capital flight and bank runs, which destroys trust and political capital, depletes and redistributes resources that might have gone to finance recovery (see Roubini & Setser) ... and ends in default.

Mind you, I am not advocating disorderly default, but rather suggesting that it is of a piece with order, chaos, and other pure, but under-specified alternatives to messy reality. Disorderly default is evil in the same way that pristinely orderly bankruptcy is good. By taking default (orderly or otherwise) off the table early in the crisis, while refusing to finance a credible alternative, the European political leaders may have chosen the worst of all options.

As grandpa used to say, it is much better to be rich and healthy than to be poor and sick.

Comments

Given that a "disorderly default" is an unexpected default, I don't see how it's possible for Greece to have a disorderly default. Only Rip van Winkle emerging from a 20-year nap would be surprised by a Greek default at this point.

Disorderly default is where the CDS's get enforced.

Disorderly default, one that comes as a surprise to the markets, leading to contagion, capital flight, bank runs, a crashing collapse of the Euro, and widespread litigation, is surely unappetizing. But the alternative to disorderly default might also be a priced-in default with minimal contagion, a contentious restructuring with lots of litigation, or a slow-bleed near-default, complete with capital flight and bank runs, which destroys trust and political capital, depletes and redistributes resources that might have gone to finance recovery (see Roubini & Setser) ... and ends in default.

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