At the beginning of 2010 it became clear that Greek public debt was becoming unsustainable. Greece could no longer borrow from the international bond markets.
If, at the time, Greece had defaulted with a 30 per cent or greater ‘haircut’ (loss) imposed on bondholders, Greek debt would have become sustainable in the long run. The country would have had to borrow internally, perhaps issue IOUs (as it has done already) and impose a few modest cuts. The effect of such a policy would have been mildly recessionary.
