Greece and the Emperor's New Clothes

In Hans Christian Andersen's tale of the Emperor's New Clothes, the emperor and his whole kingdom deny the fact that the Emperor has no clothes on because they fear the consequences of declaring the truth of what they see. The first person who declares the truth is a small child, who looking at the Emperor declares, "But he hasn't got anything on." This simple statement from a child is overheard by others and, feeling enabled by the words of a child, the word is spread quickly through the whole town. 

There are many aspects of this story that don't apply to the Greek situation, but the one comparison worth considering is that little Greece (with a GDP less than that of Mexico City) stood up and declared that its debt burden was not sustainable and that significant debt forgiveness would be required in order for it to return to sustainable growth. Despite enormous pressure to retract this claim, the Greeks have stood by their statement. Finally the IMF has suggested that in fact, Greece is right. We are now seeing the word "spread quickly through the whole town", that a sovereign nation may require substantial debt forgiveness in order to achieve sustainable growth. 

While the conventional wisdom today is that sovereign debt must be repaid in full, especially in a world that is so heavily burdened with sovereign debt, the Greek Claim is that debt forgiveness is required. The fear is that any forgiving sovereign debt (particularly among developed countries) would have such a cascading effect on the financial institutions of the world that it could put at risk the worldwide economy. 

The good news for Greece is that the Troika have decided to fund the Greek government and the Greek banking system while they discuss this perplexing Greek Claim of sovereign debt forgiveness (which is now endorsed by the IMF).

While the word is spreading quickly "through the whole town", how the world deals with the #GreekClaim of sovereign debt forgiveness will have far-reaching effects, especially on the developed countries of the world.