Possibility of Greece default is 89 to 97%, Milken report says

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Greece is almost certainly going to default on its debt -- and that’s what some economists at the Milken Institute recommend. The economists, in a report titled ‘Greece’s ‘Unpleasant Arithmetic,’’ say that the probability of Greece defaulting on its debt is 89 to 97% -- and that the country should just write down its debt to end the uncertainty about the country’s economic stability.

‘It’s like having a toothache and not dealing with the toothache except for taking temporary measures,’ said Jim Barth, one of the report’s authors. ‘Postponing the problem is no way to deal with the toothache.’

European banks have $43 billion of exposure to Greece’s debt, falling mostly in France and Germany. If Greece writes down its debt, those banks will lose capital, making it harder for them to loan money. That could lead to a recession, which, in turn, could affect the U.S. economy because of less demand for U.S. exports.

But if French and German governments, or the Eurozone, bails out those banks, that recession could be avoided, Barth said.

Without Greece writing down its debt, uncertainty will continue to cripple the economy, Barth said.

‘The major problem is that uncertainty exists,’ he said. ‘There was an attempt to say that the Greek government, through austerity measures, cut expenditures. That would enable the Greek government to get its debt level down. But it turns out that the Greek government has a level of debt that’s totally unmanageable.’

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-- Alana Semuels