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Greece: The Most Powerful Country in the World

Tuesday, 1 Nov 2011 | 10:51 AM ET
CNBC.com

I've been writing for quite some time that I did not expect Greece to passively accept the onerous austerity conditions that so many of Europe's elites sought to impose as a condition for bailing them out.

Greece has an ancient and noble tradition of defaulting. And, arguably, the other European nations have even more to lose than Greece through a default.

So Merryn Somerset Webb's remarks at Money Week strike me as very much correct:

Greece has all the power. The talk around the bail-outs is usually about what Germany is prepared to do rather than what Greece is prepared to accept. Germany is assumed to have the power. But Greece has now shown the markets that it just isn’t so. If the Greeks decide they don’t fancy the terms much and announce a disorderly exit, it is game over for the euro, for Europe’s economy and for Germany’s weak currency-driven export boom.

Time for everyone to start being a bit more polite to Greece. A senior member of Angela Merkel’s government has noted that he is irritated: “"Other countries are making considerable sacrifices for decades of mismanagement and poor leadership in Greece,” he says. I suspect that if they don’t start staving off the next banking crisis, they might have to make a few more.

I'll add something else: if Greece repudiates its debt, I do not believe that the parade of horrors that many predict will follow. I do not believe, for instance, that it will be permanently shut out of credit markets. For one thing, it is already shut out of credit markets for the foreseeable future, so default won't change that.

But a post repudiation Greece would have one of the healthiest balance sheets in Europe. It would be a very good credit. Much better than it is now. Sure, some financial companies may hesitate to lend to a recent defaulter. But there are sources of capital around the world that would be very happy to lend to a country with a clean balance sheet, on the grounds that a subsequent default is very unlikely.

Vengence, after all, is not a financial strategy.

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