Shuffle - Desmond Lachman

Sir, Alan Beattie suggests ("Brazilian lessons for Greece from the hair-shirt school", August 25) that Greek prime minister George Papandreou would do well to emulate Brazilian president Luiz Inácio Lula da Silva's adoption of IMF-style fiscal austerity during his early years of office. In so doing, he fails to recognise a number of fundamental differences between Greece today and Brazil then, which render such a comparison of limited value.

Brazil's economic imbalances in 2001 were but a fraction of Greece's more than 13 per cent of gross domestic product budget and external current account deficits. As such, the International Monetary Fund did not require that Brazil adopt anywhere near the full 10 percentage points of GDP in combined public spending cuts and tax increases that it is now required of Greece in 2010 alone. Nor did the IMF require Brazil to undertake such an unprecedented amount of fiscal tightening in the context of eurozone membership, which precludes the use of currency depreciation to boost exports.

Mr Beattie also overlooks the fact that Greece's sovereign debt structure makes it very much more amenable to restructuring than was Brazil's. Whereas almost the entirety of Brazil's external debt was subject to US or UK law, around 90 per cent of Greece's sovereign debt is subject to Greek law. As such, the Greek government can restructure the overwhelming part of its debt by a change in Greek law without the fear of being long shut out of international capital markets.

Mr Beattie is certainly correct in asserting that a Greek default would inflict major damage to the European banking system. However, it is far from clear why Mr Papandreou should put the Greek economy through the IMF wringer for the sake of some foreign banks. This would seem to be especially true when Mr Papandreou has viable policy alternatives and when, as Mr Beattie himself concedes, an eventual Greek debt restructuring is unavoidable.

Desmond Lachman is a resident fellow at AEI.