If Greece were to default and force a debt reorganization, the result might be bank runs, contagion to other countries, triggering of credit default swaps and political strife within Europe, said Jeffrey Sachs, who heads the Earth Institute at Columbia University.
For that reason, he wrote in the Financial Times, while a default can’t be ruled out, it shouldn’t be a first or early resort.
The argument that a default is inevitable is based on the claim that, since Greece owes foreign creditors about 120 percent of national income, servicing the debt will prove unsustainable, Sachs said.
Average interest rates on Greek bonds are above 6 percent a year and if the country had to pay that much, the burden would indeed be impossible to bear; however, if a low interest rate were to be negotiated and repayments extended over 20 years, the debt could probably be serviced, Sachs said.
Assuming a 3 percent economic growth rate, the country would be able to service its debt and cut the ratio of debt to GDP from 120 percent to 70 percent over the 20 years, he concluded.