Opinion: Default: A 'stairway to hell’ for the Greek people

The Greek crisis has often been compared to the Argentinian one. Both countries were not free to apply their monetary policies prior to the crisis. In Argentina this was due to pegging the peso to the dollar in 1991 as a response to hyperinflation. In Greece this is due to the euro.

Both countries received foreign financial assistance and introduced severe austerity programmes. In both cases political fragility went hand-in-hand with the crisis resulting in the governments managing the austerity programmes being voted out of office.

Argentina defaulted on its record $100 billion debt in December 2001. Shortly before this, on 30 November, and in response to massive cash withdrawals, the government had introduced a freeze on bank deposits.

Angry demonstrations followed as individuals and business could not make any payments.

A few days later the IMF announced that it would not release the installment of its loan to Argentina because it did not fulfill the conditions of the agreement, leaving the country in a hopeless state as it could not raise funds from any other foreign source.

After this point the country stepped into chaos with protests and looting becoming everyday phenomena.

Greek deadline

As the deadline to reach an agreement on the extension of the Greek bailout looms and with no signs of an EU-Greek consensus being reached, Greece is looking more and more like Argentina.

Greece’s creditors will not release the €7.2bn bailout assistance unless the government submits a convincing programme of structural economic reforms.

The threat of capital controls has been present since February 2015 as well as the prospect of a Grexit (Greek exit from the eurozone), Greece being left in limbo, and a default.

Although the rumours that Athens asked for assistance from Russia were refuted, the Western European orientation of the country has now been put in question.

In the meantime, Greeks have been pulling their savings out of the country. Recently the government issued a Presidential Decree that forces state entities and local governments to put their spare cash in a ‘common fund’ at the Bank of Greece, which will finance state pensions, salaries and loan payments.

Social unrest

Social unrest has been rising.

A group of Mayors reacted to the Presidential Decree; 4,000 miners walked out in Athens protesting against the government decision to suspend the activities in the gold mine of Halkidiki, while anarchist groups have been clashing with the police and occupying public buildings demanding the abolishment of Type C maximum security jails.

Argentina’s insolvency saga had dramatic socio-economic effects.

Following the default on its debts, President Eduardo Duhalde ended the convertibility system that pegged the peso to the dollar and the peso was devalued. Due to the devaluation, bank depositors lost $23 billion and banks $12 billion. Individual depositors saw the value of their savings evaporate and the middle class disappeared.

During 2001-2002 the Argentine economy shrunk by 16.4 percent, unemployment rose by 23.6 percent and the percentage of people below the poverty line increased from 38.3 percent to 57.5 percent.

In 2002 inflation was 41 percent of GDP, wages fell by 23.7 percent due to inflation, real supermarket sales fell by 28.1 percent, 40 percent of Argentinians lived on $1 or less per day and 20 percent of them on $1-$2 per day.

In the business sector, bankruptcies were everyday phenomena; many companies faced liquidity problems or experienced big losses. Utility companies suffered from the reintroduction of the peso as they had bought their equipment from abroad mostly in dollars or other foreign currencies.

Greek default

There are many reports speculating on what will happen if Greece defaults on its debt and exits the Eurozone. All of them are grim.

Currently, the risk of poverty in Greece is 34.6 percent. And Greece is seen as not likely to revert to growth as fast as Argentina did because the dynamic of the global economy and the international political economic relations of the country are different.

Thus it is also possible that more austerity will follow a default in Greece.

A default would also have a catastrophic effect on Greece’s efforts to adjust its economy.

Greece’s current account deficit shrunk from -10.4 percent of GDP in 2011 to -2.5 percent of GDP in 2014, its structural fiscal balance improved by 8 percent of GDP during the same period, whereas unemployment increased from 17.9 percent in 2011 to 27.5 percent in 2014.

The economy started growing again during the second half of 2014 and was expected to continue doing so even faster in the subsequent years. But now all the hard work is at risk of being undermined leaving Greek people only with the cost of adjustment.

Greece needs to find a compromise with its creditors so that default and an euro exit is avoided.

It is doubtful whether the Syriza-led government can do this given Tsipras’ reluctance to clash with Syriza’s anti-euro opposition.

International experience, however, suggests that a default, whichever form it takes, will be a ‘stairway to hell’ for Greece, with unforeseen, yet unprecedented and long-lasting consequences for the Greek people.

Dr Eleni Xiarchogiannopoulou lectures at the Institute for European Studies at Université Libre de Bruxelles