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What if Greece defaults on its soverign debt? A while back, the story was this: default would trigger a ‘credit event’, which would in turn activate a complex web of insurance agreements, leading to a Lehmans-style meltdown of the European banking system. Thus everything must be done to stop Greece from defaulting.

Except that Greece already has defaulted, and, as Simon Johnson and Daron Acemoglu point out, a credit event has been triggered, meaning that those who sold the relevant bits of paper (credit-default swaps) have had to pay out. But did the stool sample hit the fan? Er, no. The European banking system is still very much with us.

So what explains those doomsday predictions?

  • "The answer should be clear by now: interest-group politics and policy elites’ worldview. Even if the risk to the financial system was minimal, the impact on banks and bondholders was substantial. They stood to lose billions, and many financial-sector employees stood to lose their jobs. Not surprisingly, leading bankers lobbied against debt restructuring, both behind closed doors and publicly."

But don’t think crying wolf hasn’t already paid off:

  • "Even now, many of the losses that bankers should have faced are being shouldered by the public sector, including through various forms of direct support and the extraordinary and risky actions of the European Central Bank. The extent of subsidies in this sector is stunning."

Here’s a thought: Before we start raising taxes on the rich, we could try not subsidising them first.

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