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Greece woman on street Michael Debets/ZumaPress

How to Default on Sovereign Debt

The financial brinkmanship over Greece’s debts has raised the question of whether (or when) the country will default on its sovereign debt. As Greek officials consider their options, they would do well to bear in mind that there are better and worse ways to default.

ITHACA – The financial brinkmanship over Greece’s debts has raised the question of whether (or when) the country will default. To be sure, it would be far better for Greece and its creditors to reach a negotiated solution. But that outcome is far from guaranteed. The Greek government barely managed to make a significant payment last month, and even larger payments fall due throughout the summer, starting in June with an installment of more than €1.5 billion on its liabilities to the International Monetary Fund.

As Greek officials consider their options, they would do well to bear in mind that there are better and worse ways to default on sovereign debt – especially given countries’ desire to reestablish their creditworthiness as soon as possible. In the coming weeks and months, the Greek government would be wise to consider three guidelines:

Don’t name-call: Default is painful, even if it does turn out to be the right choice in the long run. In the midst of all that pain, it is tempting to point fingers. But it is important to resist this urge. More likely than not, sovereign debtors will have to interact with the same creditors and international actors again. It is hard to know how much harm Argentina’s undiplomatic pronouncements during its default saga did to its efforts at navigating the United States’ legal system; what is clear is that its ill-considered official rhetoric did not help its case.

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