Are "organised and orderly" sovereign defaults a good solution?

- "More and more voices are calling for "orderly defaults" for over-indebted euro-zone countries."
- "The advantage of a (partial) default for the sovereign debt is clear: reducing the country’s debt ratio to the level where it is sustainable (a stabilisation of the public debt ratio at this level is feasible without an excessive primary budget surplus). After an "orderly" default, the risk of a new default can be ruled out, and the interest rate on the country’s debt ought to decline."
- "What are the drawbacks or the risks?
perhaps unbearable losses for banks and institutional investors that hold the country’s debt, and need - if that is the case - to recapitalise them, which may increase other fiscal deficits;
investor expectations that an "orderly" default may affect other countries, leading to a contagion of the rise in interest rates;
moral hazard for countries posting excessive fiscal deficits;
rejection of other solutions: monetisation by the central bank, restructuring of the debt without any actuarial loss for its holders;
funding problems for the defaulting country, at least for a while."
Natixis Flash Economics 348 20100705

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