Greece's soft budgets in hard times. CEPS Commentary, 7 March 2012

The first de facto default of a country classified as ‘developed’ has now taken place, with private international creditors ‘voluntarily’ accepting a ‘haircut’ of over 50% on their claims on the Greek government. As a result, Greece now owes very little to private foreign creditors. The country also agreed to even more stringent budget targets and, in return, received funding of more than €100 billion ($134 billion) to stabilise its banking system. The purpose of the entire package is to avert a full-scale default and allow the country to complete its financial adjustments without unsettling financial markets too much. But this approach (a haircut on private sector debt plus fiscal adjustment) is unlikely to work on its own