The Fiscal Economics of a Greek Exit

This commentary examines how much Greece’s creditors would lose if the country were to exit the eurozone. It states that the assumption that an exit would be followed by a default because the new currency would depreciate so massively that debt service in euros would be impossible is wrong. Rather, Greece’s debt is foreign debt and must thus ultimately be serviced through higher exports or import compression. It argues that an exit followed by a massive depreciation of the new drachma should accelerate export growth and provoke a further fall in imports, thus increasing the capacity of the country to service its foreign debt.

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