We often casually reference the 800 lb. Gorilla in the room to allude to issues which we prefer to ignore. In this regard, the hobbled, battered, beaten and tattered economy of Greece is a lot more like the 80 lb. model in a room full of coke dealers. While nobody with scruples is going to feel sorry for a crack whore, are there moral bounds to vulture capitalism?

It seems to me that in the case of Greece we are not only seeing the irresponsible behavior of a borrower who has gone too deep in the red to come back. It also seems that we are seeing a re-emergence of Mercantilism and economic policy which Europe (supposedly) outgrew way back in the 18th century. Looking at the facts on the ground, however, it certainly does not seem that this alleged maturation has actually happened.

Definitions and Defiance

Mercantilism. The economic doctrine that says government control of foreign trade is of paramount importance for ensuring the prosperity and security of a state. In particular, it demands a positive balance of trade. In thought and practice it dominated Western Europe from the 16th to the late-18th century. Mercantilism was usually a cause of frequent European wars in that time. It also was a motive for colonial expansion. Mercantilist theory varied in sophistication from one writer to another and evolved over time. Favors for powerful corrupting interests were often defended with ill-considered mercantilist reasoning. Today, it is widely rejected in the West but lives on in the neo-mercantilism practiced in many Asian countries.
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Hmmm. I beg to differ with this last line. The ECB and the underlying banking infrastructure has done everything to present this story as the case of a wayward borrower who must not be allowed to set evil precedent but the reality is though the Greeks are hardly a model of austerity, every tango requires two dance partners. The European Union was more than happy to usher in an unprepared Greek economy into the EMU and more than happy to let bond traders play three-card with Greek swaps. Much like Iceland, Greece has the right to decide what it wants to do in this situation, the ECB is actually making the Fed look somewhat reasonable with its we are the King’s Bank routine.

TF Market’s Peter Tchir addresses the situation from a rational perspective, something that the European powers that be (who seem to look at Greece as a colony rather than as a compatriot) refuse to do:

It is Greece’s decision to default or not, NOT the ECB's or EU's

I continue to be confused by the fact that most people talk about the issue from the lender's perspective. "Should Greece be allowed to default?" "Does it teach Greece a bad lesson if they let them walk away? " "Won't Greece just default again if the ECB lets them walk away?"

The reality is the IMF, or ECB, or EU can offer money to Greece, but it is Greece's decision to borrow more to pay off old debts. Only Greece can decide to make payments and not default or demand restructuring. Other entities or countries can make it easier for Greece to kick the can down the road, but in the end, only Greece can decide whether or not to pay its bills.

The people of Greece seem to prefer default. It is fairly clear that this is not a short term liquidity problem, but a longer term solvency problem for Greece. Greece has some assets it can sell, but as I have said time and again, they will still have those assets to secure new funds after a default/restructuring. I continue to believe it is in the best interest of Greece to default and it is their decision, no one else's. It may be bad for the rest of Europe if Greece defaults, but that really should not be the priority of the Greek government.

If Greece defaults, the creditors can then take steps to enforce their rights. If a person fails to pay on their mortgage, the banks can enact their rights to foreclose. If a U.S. company fails to pay its debt, creditors will suit, and the company and debtors will typically resolve the issue in the courts under Chapter 11 or Chapter 7. There are similar statutes for corporate defaults in other countries. The real reason that we are hearing so much about this from the lenders perspective, rather than the borrowers, is because it is not very clear what the lenders' rights are if Greece stops paying.

If Greece stops paying, the lenders cannot 'foreclose' on it. There is no law that dictates how to proceed like chapter 11 does. The bonds have very few if any covenants. The lawsuits would have to be won in Greek courts and then enforced by people employed by the Greek government. Good luck with that.

The reason the lenders have an almost irrational need to avoid a default, is they don't know what they will get if Greece does default. There is no good way to analyze it. Their ultimate recovery will be based on some threats of future lending, rights of set-off, and maybe some threats of trade sanctions, but unlike a mortgage or a corporate bond, there is no good way to analyze the potential outcome. There is a reason 'vulture' funds focus on corporate debt much more than sovereign - there is a way to analyze the outcomes, it is not just guess work.

So people can continue to comment on whether Greece should be allowed to default, but that misses the point. Lenders can make it easy for Greece to make payments, but choosing to default or not remains solely a Greek decision and they should do what is best for them.