Will Greece Go Bankrupt and Kill the Euro? The Benefits and Cost of Helping Greece

This paper considers the benefits to Greece, the Euro zone and the rest of the world arising from policies that prevent a Greek default and exit from the Euro, compares these benefits with the costs of the preventive policies and concludes that the benefits exceed the costs. The rational case for policies to save Greece, however, may lose out to unpredictable politics and nationalist aspirations. The second part of the paper looks for the origins of Greece's problems and concludes they were due to the failure of lenders to ask for a proper risk premium on the country's bonds, which in turn was due to Greece's publication of false economic data and the failure of credit rating agencies to down-grade its bonds, all taking place during global financial euphoria and supply of liquidity that made lenders disregard traditional standards in all their dealings. The paper recommends policies to ensure the proper functioning of financial markets to prevent future crises and rejects collective controls over national budgets that have been proposed as unacceptable intrusions on national sovereignty