Shuffle - Desmond Lachman Resident fellow Desmond Lachman

Sir, Nouriel Roubini is certainly correct in questioning whether the International Monetary Fund's draconian fiscal adjustment programme for Greece will succeed in stabilising Greece's public debt at a sustainable level ("Greece's best option is an orderly default", June 29). However, Prof Roubini is disingenuous in intimating that an early orderly default would be a panacea for Greece's fiscal problems, and that it would not be particularly painful for the European banking system.

A disturbing aspect of Greece's public finances is that only around 6 percentage points of its 14 per cent of gross domestic product budget deficit constitutes interest payments. Accordingly, any debt restructuring for Greece would need to involve at least a 50 per cent writedown if it was to provide Greece with any meaningful relief for its public finances. Such a large writedown on Greece's $420bn sovereign debt would constitute a severe hit to the European banking system even if it were not to set off contagion to Spain, Portugal, and Ireland.

One must suppose that were Greece to engage in a pre-emptive debt restructuring it would be forced to eliminate in short order its 8 per cent of GDP primary budget deficit for want of financing. It is difficult to see how within the straitjacket of the euro this would not result in a marked deepening in Greece's recession.

This would suggest that Greece's best option is not simply to restructure its debt as Prof Roubini suggests but rather that it accompanies such a restructuring with an exit from the euro that would allow Greece to become internationally more competitive.

Desmond Lachman is a resident fellow at AEI.