Greece Can Default Without Exiting Euro, Cochrane Says

Greece could default on its debt and still avoid an exit from the euro, said John H. Cochrane, a finance professor at the University of Chicago Booth School of Business.

The country would be better off passing structural reforms, pursuing economic growth and paying off its debt burden while staying in the currency bloc, Cochrane said during an interview on Bloomberg Television’s “In the Loop” with Betty Liu. While default would be a “huge mess” resulting in the failure of most Greek banks, he said, it would be less traumatic to Europe than a euro exit.

“A small country defaulting on its debts isn’t that big of a tragedy,” said Cochrane. “It says the euro is a firm currency zone. That actually has a more calming effect than the opposite situation.”

The pro-bailout New Democracy and Pasok parties won enough seats to form a majority in Greece’s 300-member parliament, according to the vote count posted on the Greek Interior Ministry’s website, easing concern that Greek voters would reject the austerity measures needed to qualify for international aid.

Greece is running out of time regardless of what steps it takes to remedy its debt situation, Cochrane said.

“People are taking their money out of Greek, Italian and Spanish banks at a monstrous rate and either putting it in mattresses or getting it out of the country,” he said. “That’s going to really push events quicker and quicker.”

‘Right Answer’

Of Greece’s 266 billion euros ($335 billion) of debt, about 194 billion euros, or 73 percent, is held by the European Central Bank, euro-area governments and the International Monetary Fund, according to the Greek debt management Office in Athens. In 2010, before the first bailout, Greece owed about 310 billion euros, all to the private sector.

Monetary reforms proposed by ECB President Mario Draghi stressing cooperation across nations could help, Cochrane said. Draghi said on June 15 that a blueprint for the future of europe’s monetary union will be published “very soon.”

Draghi’s proposed structural reform program is “exactly the right answer,” Cochrane said. “They need to get the sand out of the gears and show the bond markets that they’re serious now.”

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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