Greece is heading into uncharted waters for an EU country: It’s nearing a default, a possible currency crisis, the collapse of the banking system and exclusion from international markets. What awaits Athens is familiar to Argentina.
The Latin American country defaulted on $82 billion in sovereign bonds in 2002 and has since weathered more than a decade of debt restructuring. POLITICO talked to Guillermo Nielsen, former secretary of finance and chief negotiator for Argentina 10 years ago, when the country was negotiating its debt restructuring with the International Monetary Fund.
What advice for Greece?
It’s not the end of the world.
With the right fiscal policies, Greece will be able to survive an exit from the euro, said Nielsen.
“Life goes on,” he said. “Greece will have to get ready to cross the desert for about a year until fiscal results can be shown to the financial world and they get back to markets. It’s not as tremendous as it sounds.”
No other country in recent history has faced the same situation as Greece, which is breaking precedent by putting the question of a default to a plebescite and edging ever closer to becoming the first country to leave the European common currency. The problem for Greece is that the treaties setting up the euro are one-way — no one foresaw the possibility that a country would want to revert to its national currency after joining.
If Greece does default, Nielsen said that the best path for it to follow would be to swiftly devalue its new currency and try to build a fiscal surplus and return the country to growth.
“If they devalue, they can use the devaluation as part of the medicine to get as fast as possible to a fiscal surplus,” he said.
The issue is that it will require a deft hand to reintroduce the drachma during a possible bank run and political chaos. The populist government of Prime Minister Alexis Tsipras hasn’t yet shown an ability to steer the country back to health; the five months of tortuous negotiations with the rest of the eurozone have sapped confidence and driven the country back into recession. In the midst of a euro exit crisis, the government would have to be able to handle a managed decline in the value of the new drachma.
“If they manage the fiscal equation well, they can go back to growth very fast, but I doubt they do it,” said Nielsen. “With the spirit they have shown, the government of Tsipras, I doubt that they’re going to have a good fiscal policy.”
The issue is that it will require a deft hand to reintroduce the drachma during a possible bank run and political chaos.
Another problem for Tsipras is that the long crisis has left the banking sector on the verge of collapse. It only survives thanks to Emergency Liquidity Assistance (ELA) from the European Central Bank, currently worth almost €90 billion. That support helps to make up for the more than €40 billion that worried Greeks have pulled from banks since the start of this year.
But the ELA is likely to expire along with the bailout program on Tuesday, which could sink Greek banks. That makes any post-euro revival even more problematic because the banks have wasted away and have very little financial lifeblood needed to weather a default. Without viable banks, consumers and business will have a very difficult time rebuilding after a Grexit.
“You need to have financial muscle to go through a default — you need to have some domestic instruments,” Nielsen said. “I’m afraid what they have is a weakened situation as a result of capital outflows.”
And the Argentina example shows that a default is not a quick and easy process.
Argentina is still entangled in disputes with holdout investors who have refused to accept a haircut in the value of their bonds, which has stopped Argentina from accessing international debt markets since the default.
The impact was also devastating on ordinary Argentinians. The peso went from being at parity with the U.S. dollar to about a quarter of its pre-crisis value. Inflation soared and the economy contracted. It took more than five years for Argentina’s economy to return to the size it was in 2001.