This question has now become one of great urgency since the contagion that might be set off by a Greek default could spread like wildfire, engulfing not only the other fiscally profligate countries in the eurozone besides Greece, i.e., Portugal, Ireland, Italy and Spain, but the entire global economy. Turkey, which has already suffered greatly from the global recession amid the US-epicentered global financial crisis -- preceding the potential global sovereign debt crisis we are now facing -- could be hard hit again before making a full recovery. Turkey would suffer from the stalled recovery of the eurozone and the EU from the global recession since it depends on those markets for half of its exports. Turkey would face, along with other emerging markets, higher borrowing costs in international capital markets, in terms of a wider Emerging Markets Bond Index Plus (EMBI +) spread, as shown in the figure below. Turkey would also find it more difficult, along with other emerging markets, especially those close to the eurozone, to attract both portfolio and direct investment to finance its current account deficit. Faced with all this collateral damage to the Turkish economy, the Justice and Development Party (AK Party) government would have to implement its Medium-Term Economic Program effectively toward fiscal stabilization with or without a new stand-by arrangement with the International Monetary Fund (IMF), which appears now less likely but more needed than it was before the Greek crisis.
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Since the outbreak of the Greek crisis, a debate has been raging on the pros and cons of a bailout and on its form. The bailout advocates argue that Germany and France, the eurozone and EU leaders, are condemned to save Greece from default for two negative reasons. The first reason is the contagion that would spread throughout the eurozone sovereign debt markets, as noted earlier. The second reason is the fact that German and French banks hold directly and indirectly large portions of Greek bonds. The bailout advocates also argue, as a positive reason, that the Greek crisis has created the opportunity to move aggressively toward a closer economic integration in the eurozone in terms of common fiscal policies, regarded as essential for the long-term viability of the euro. The bailout advocates insist that the eurozone itself should lead the bailout instead of the IMF, although they would accept the IMF’s technical assistance in cleaning up Greece’s messy public finances. They object to having the IMF lead the rescue since that would damage the prestige of the eurozone. (But French President Nicolas Sarkozy might have his personal objection to the IMF, whose Managing Director Dominique Strauss-Kahn might challenge him in the 2012 French presidential election.)
I will continue this discussion in my column tomorrow and will try to reach a conclusion as to what possible future awaits Greece by placing special emphasis on the controversies within Europe over providing a bailout to save the country.
