Greek Debt Default Is Increasingly Likely, Raghuram Rajan Says

Raghuram Rajan, a professor at the University of Chicago and a former chief economist at the International Monetary Fund, said a potential restructuring of Greek debt seems increasingly probable. He spoke at a conference in Singapore today.

On Greece:

“Potential restructuring of its debt seems to be increasingly probable. It’s one of those things where the political will required to do what would be necessary to service the level of debt that is building up, is reaching the limits of what Greece can do. In other words, I won’t say it’s inevitable but it looks increasingly likely.

“If it happens without having prepared the banks and the markets for it and it happens because of a breakdown in European dialogue, there could be potential contagion effects for other European countries.

“If it happens in a way that is prepared for, even if not publicly at least privately prepared for, it is very well containable.

“One of the advantages of this long, drawn-out crisis resolution process is that many private sector entities that were exposed to Greece have reduced their exposure. So the extent to which banks in Europe are exposed to Greece is much more limited now than even six months or a year ago. So the cost of a Greek default and restructuring could be absorbed by the banking sector.”

On China:

“Clearly, the Chinese authorities understand the longer- term focus has to be an increase in consumption growth and making consumption a bigger part of the economy.”

On India:

“The fiscal side has to come into consistency with the monetary side for both to work in the same direction and to have the proverbial soft landing. Otherwise you might find that monetary policy has to work much harder, which would have a substantial slowdown effect on things like investment, which is critical in India.”

On inflation in China, India:

“We must remember with both countries, monetary policy works with longer lags and less effect than it might work in industrial countries. So it’s not that the central banks raise interest rates or increase reserve requirements and automatically there’s an effect. It takes time to play out.

“Certainly in India, you’re seeing the first signs of slowing in consumption demand. So long as fiscal policy cooperates, you should see some slowing into the rest of this year and hopefully a softer landing. China, again, at least there is some hope that toward the end of the year inflation pressures will have tamed. The jury is still out on both countries.”

To contact the editor responsible for this story: Stephanie Phang in Singapore at

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