One aspect of the Greek Debt crisis that has not been discussed are the conditions under which the ECB will print money to avert a default. Sovereigns with their own currencies do not default as they can simply monetise their debt. The resulting inflation is a tax borne by nominal asset holders. Greece shares a currency so the Government cannot unilaterally order the ECB to monetise their debts – the ECB must make this choice…

So far, President Trichet has insisted that the Euro-area levy taxes to pay for Greece’s excesses. Nevertheless, he must surely be weighing the choice between using the inflation tax option rather than allow default.

My guess is that if the Euro-area bailout does not eventuate, the ECB will roll the printing presses…

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