This from the NYT (via The Reformed Broker):

As concerns grow that Greece may default on its government debt, economists are starting to map out possible outcomes. While no one knows for certain what will happen, it’s a given that financial crises always have unexpected consequences, and many predict there will be collateral damage.

Because of these fears, Greece is working frantically in concert with other European nations to avoid default, by embracing further austerity measures it has promised in return for more European bailout money to help pay its debts.

But some economists believe default may be inevitable — and that it may actually be better for Greece and, despite a short-term shock to the system, perhaps eventually for Europe as well. They are beginning to wonder whether the consequences of a default or a more radical debt restructuring, dire as they may be, would be no worse for Greece than the miserable path it is currently on.

Read on for the full story. Meanwhile, Dr Doom, Nouriel Roubini is calling for Greece to even leave the Eurozone:

“Greece is stuck in a vicious cycle of insolvency, low competitiveness and ever-deepening depression,” wrote the famous Roubini in an op-ed piece for the FT.

Roubini is among those that think Greece should indeed exit the Eurozone.  Dr. Doom explains that without a return to growth, Greece’s debt situation will remain unsustainable.  Further draconian fiscal austerity, along with insolvency and low competitiveness, will do nothing more than prolong a deepening recession-cum-deflationary depression for five to ten years.

Greece’s main problem, then, is one of competitiveness, and the only way to solve this, according to Roubini, as by reinstating the drachma.  There are other ways for Greece to regain competitiveness, for example, the euro could be weakened substantially in order to provide relief to Greece and its fellow PIIGS, which appears “unlikely while the US is economically weak and Germany uber-competitive.”

Other options to restore competitiveness are equally untenable.  Structural reforms that would bring down unit labor costs can take up to ten years, as the German experience has shown, while “rapid deflation in prices and wages, known as an ‘internal devaluation’ […] would lead to five years of ever-deepening depression, while making public debts more unsustainable,” wrote Roubini.

The only other option, then, is for Greece to leave the Eurozone in an orderly default, renegotiating the recent debt swap deal (which Roubini calls a “rip-off” because it actually provides near to no debt-relief given sweeteners offered to creditors), and an exit from the European Monetary Union.

As I see it, getting Greece to honour its debt is a no-go: The enforced austerity measures will only curtail growth, their cost of debt is now untenable, kicking the can down the road and hoping for the best isn’t going to help given the bleak growth outlook in the rest of the Eurozone and the world.

So, the big question is, if the Greeks haven’t defaulted yet, is it because default isn’t the path of least resistance yet? Or is it because they’re being supported by the rest of the Eurozone who don’t want to see their banks go down too. My money’s on the latter and also because they don’t want to set a precedence- imagine Italy defaulting.

Mirror, mirror on the wall, who's the fairest of them all?