'Default best for Greece' says leading US economist


A leading US economist has said that it would be better if Greece were to announce it will not pay back its creditors.

In an interview with the BBC's Business Daily, Kenneth Rogoff, professor of economics at Harvard University , told Justin Rowlatt that economic history is riddled with "hundreds of defaults", and the Greece should begin restoring its economy anew.

He went on to say that the problem in Europe is not the possibility of default but that "there is no plan B".

Transcript is below.

Kenneth Rogoff: There have been hundreds of defaults in countries you might not imagine would have defaulted. So Greece defaulted many many times, Austria, Germany, France has defaulted eight, nine times in its history.

Justin Rowlatt: I have got an extraordinary table in front of me. England has defaulted three times, most recently in 1594. But as you say, Greece has previous record in terms of sovereign defaults. They have had one, two, three, four, five sovereign defaults, most recently in 1932. Why this pattern of default with Greece?

Kenneth Rogoff: Well, it's common to everybody. There are very few countries that don't have a history of serial default doing it again and again. It just takes time to grow from being an emerging market to a modern economy and virtually everyone went through that stage. Imagine that England's last was in the 1500s. That's default on foreign creditors. They have had domestic ones after that. But a country like Spain has defaulted 13 times…

Justin Rowlatt: I was going to come on to that; the Spanish state has the longest record of sovereign debt default, doesn't it?

Kenneth Rogoff: It does. Venezuela is coming on strong, but they only gained independence in 1800. I think they will pass Spain eventually.

Justin Rowlatt: But when you look at the current European situation that record of Spain defaulting again and again; I mean just in the 20th century, they defaulted in 1936, 1937, 1938 and in 1939, why was anyone lending money to Spain in that period?

Kenneth Rogoff: Well, first of all, creditors get a risk premium for making these loans, so they get higher interest payments during the period where they are getting paid. The lenders to Greece were getting a premium for a long time. They want to be paid in full, but if they were so sure they ought to get paid by the Germans, why were they charging higher interest rate in the first place? That's part of it. And there are other countries that everybody thought would default, but never did and Australia is an example where they've borrowed like crazy. When I worked at the International Monetary Fund in the early 1980s, everybody thought Australia was going to default but it didn't.

Justin Rowlatt: Looking at this history, this long history of sovereign defaults, on balance has it been a good or a bad thing for the countries that have chosen to say, "listen guys, we simply can't pay our debt?"

Kenneth Rogoff: I think when your debt gets too high, there comes a point where just defaulting is the best option and that's what countries eventually do where you don't have the political consensus to engage in the austerity measures to do what's needed to pay.

Justin Rowlatt: So is this the "Professor Rogoff's advice" to Greece is default on your debt guys, in the long run that's going to be best for you?

Kenneth Rogoff: I don't think there is any question that if you look at it narrowly from Greece's point of view, it would be better to default now, clean it up and move on. Yes, it is painful to default, but countries grow afterwards and many countries have done it and done very well. The problem here is that Europe can't handle it so easily because Portugal is weak, Ireland is weak, the banking system is weak. And in essence what's happening is that Europe is bribing Greece not to default. They are giving them lots of money. Greeks aren't paying now, they are getting new money.

Justin Rowlatt: Well, let's be clear then, Ken, they are lending them lots of extra money, they are not giving them the money, are they?

Kenneth Rogoff: Well, they are lending them money that nobody in their right mind thinks that they are going to get paid in full and so the flows are still going to Greece. It would be an odd time for Greece to default right now because they are getting more new money than they are having to pay back old money.

Justin Rowlatt: If there is such a deep systemic problem of debt within Europe, I mean obviously primarily in the periphery, but a lot of the people you lent money are banks in France, in Britain and Germany. If there is such a problem of debt, shouldn't we just say, "listen we need to rationalise this, so everybody who has got a big debt problem, why don't we all default once and for all, sort this problem out and start again?"

Kenneth Rogoff: Well, I mean the thing is that there are some debtors which just can't pay, they have gone too far and I believe in Europe, it's a manageable problem. It's not that the overall debts in Europe are so great that the continent can't handle it. I mean Germany is doing well, France is doing well, so really this is just something that happens all the times. Municipalities default, states default and you clean it up. And the problem in Europe is they don't seem to have a mechanism for having this go on in a semi-orderly way. There is no plan B. They are like a deer caught in the headlights to use what's perhaps an American expression. They just don't know what to do, not the Greeks, but the European leaders. Unfortunately what's going to happen is, events will just unfold and the default will happen in a disorderly way if they don't get ahead of it, but I don't see any signs of that.

Justin Rowlatt: Well, they are pouring money into Greece, aren't they, and that's the idea is as you said to bribe Greece not to default. Are you saying you don't think that policy is going to work?

Kenneth Rogoff: No, I don't. The problem is, is that there is also Ireland, there is also Portugal. Spain is a lesser problem, but you know what, if they don't tighten their belts, if they don't get their act together, they are going to be a problem too. So you need somehow to unwind this thing. Probably at the end of the day, Germany is going to have to guarantee a lot of the remaining debts in Europe. But I don't think that can just go on forever without some kind of discipline in the system.

Kenneth Rogoff is co-author of 'This Time is Different', a history of defaults around the world.

If you thought this was interesting, why not sign up for the Business Daily podcast here