On Sunday, Greeks resoundingly said “No.” In Prime Minister Alexis Tsipras’s much-hyped national referendum, 61 percent of those casting ballots weighed in against a since-rescinded bailout offer proposed by the country’s European creditors on June 25. Most Greeks viewed the referendum as a vote on further austerity measures and continued membership in the euro. Greece’s creditors warned of dire consequences to a No vote, and voters overwhelmingly ignored them.
Thus a small Mediterranean country with an economy the size of Detroit is now heading into uncharted waters. A banking collapse, a currency crisis, a sovereign-debt default, a trade shutdown, and an exit from the euro zone are all more likely possibilities than they were three days ago.
Athens need only look to Argentina for a hint of what comes next. While it’s hardly a perfect analog, the South American country’s 2001 default on $93 billion in sovereign debt and subsequent currency devaluation is instructive for Greek voters and lawmakers, particularly because Greece’s path is far more treacherous.
“Argentina is bust. It’s bankrupt.” So said the country’s freshly elected president, Eduardo Duhalde, on January 1, 2002, after weeks of financial chaos. Severe recession and unemployment leading up to Christmas had culminated in controls on bank withdrawals. In the final week of 2001, Argentina declared itself free of sovereign debt and devalued its currency, the peso, which had been pegged to the U.S. dollar. Even as anger boiled over into the new year, the worst was yet to come.
Argentina’s economy imploded in the year after default. GDP dropped by 11 percent. Unemployment doubled to more than 20 percent and inflation rose dramatically. The peso lost nearly 70 percent of its value. Basic foodstuffs became scarce and hospitals ran short of essential drugs.
The average Argentinian was ruined. Dollar-denominated deposits were converted to pesos and lost half their value. The government effectively confiscated people’s savings. Mortgage payments were missed and business ground to a halt. Banks soon threw up sheet metal walls to keep out depositors seeking withdrawals. Thousands took to the streets to protest. As economic depression set in, similar numbers of the unemployed began scavenging cardboard in their desperation for cash.
As the government struggled to balance the books, it began paying salaries and pensions in scrip, a kind of IOU that became a quasi-currency. Over $2.4 billion in scrip — roughly half the value of outstanding pesos — was issued in less than a year, signaling a full-on monetary collapse and a cut in real wages. Dozens of different kinds of scrip made intra-country trade difficult, and most Argentinians quickly dumped the quasi-currency in favor of hoarding pesos.
Even the powerful felt the pinch. Companies lost big if they depended on consumer demand. Exiting the long-term peg to the dollar hurt many larger companies with access to global financial markets, since their foreign-currency liabilities now had to be repaid in less valuable pesos. Most private firms chose to default on their obligations, often after years of negotiations with creditors.
Political instability reigned, with the country at one point plowing through three presidents in four days. Argentina’s current president, Cristina Kirchner, assumed the reins of a recent political dynasty noted for cooking the books to cover up the people’s financial pain and the weakness of their leaders.
#related#By the end of 2002 Argentina’s economy was stabilizing. By 2006 it had repaid its debts to the International Monetary Fund (IMF). Exports doubled from 2002 to 2006 thanks to Argentina’s cheaper currency. The country’s vibrant agricultural sector was the biggest recipient of this windfall, particularly when its more competitive goods hit markets just as global agricultural prices rose in response to Chinese demand. The price for soy beans, for instance, rose from $120 to $600 a ton by mid decade, as did the value of nearly every staple crop that Argentina produced, and demand for the country’s heavy industry and steelmaking soon soared as well.
It is true that the country never reentered global debt markets. Debt swaps in 2005 and 2010 brought over 90 percent of the country’s debt out of default, but bondholders lost nearly two-thirds of the face value of their holdings. Years of litigation by those who opted out of the restructuring ensued; U.S. federal courts eventually awarded private creditors with the full terms of their bond contracts in 2013, but Kirchner’s government refused to pay, leading to another default in 2014.
Still, things could have been far worse for Argentina — they could have been Greece. Yanis Varoufakis, Greece’s now-former finance minister, said himself that it was “profoundly wrong” to believe his country could default and recover like Argentina. And returning to a weakened drachma, Greece’s former currency, is likely to be far messier.
RELATED: Beware of Greeks Casting Blame
For one thing, it helps to be an exporting powerhouse like Argentina when considering a currency devaluation. Alas, Greece’s greatest homegrown exports consist of fresh fish, which sits under an EU quota, and cotton, which depends on a struggling textile industry. In actual dollar value, refined petroleum exports bring home the most bacon for the country, yet the input, crude oil, must still be imported. Tourism remains a sizeable industry in Greece, as it is in Argentina, yet it is far from clear whether going on a cheaper holiday outweighs the risk of being tear-gassed.
The news in the fine print may be even worse. Many Argentine contracts were in pesos by the time of the country’s “peso-fication,” meaning that their terms could still be honored. Every Greek contract, on the other hand, would have to be renegotiated in the event of a “Grexit,” or exit from the euro zone and its currency. Any firm with liabilities in foreign currency (i.e., every Greek company) would face a high chance of bankruptcy.
Bailing out of debts and contracts would make building trust in a new currency far harder.
Bailing out of debts and contracts would make building trust in a new currency far harder. Few investors are likely to enter into projects or agreements denominated in a new currency, particularly without backing from the European Union. A government cannot mint confidence where none already exists.
Greece’s one saving grace is that most of its sovereign-debt contracts have clauses making it easier to impose haircuts on bondholders. The likelihood of creditors holding out for a better offer, as with Argentina, is much smaller. So-called “vulture funds” may still swoop in to assume Greece’s bad debts, letting their lawyers pick over those clauses for stray payouts. Even still, most Greek sovereign debt is held in public hands by the IMF and other European countries. Whether this is comforting to the average Greek is open for debate.
Nothing is quick or easy about the path Greece is embarking on. By checking No, the country’s voters have effectively chosen to default on its obligations to a constellation of creditors. Political and social trust is running out faster than Greece’s cash. Absolutely no one knows what comes next for Greece. There is talk of more talks and strong statements. But Argentina’s default and devaluation shows that no country can live in limbo for long.
— Michael Hendrix is director of emerging issues and research at the U.S. Chamber of Commerce Foundation. The views expressed here are his own.