Argentina's chaotic bankruptcy a decade ago triggered riots, looting and dozens of deaths. The prospect of that horror scenario playing out in Greece is focusing minds across Europe as the threat of default remains all too real.
At best, if private creditors walk away from a voluntary debt
restructuring, a disorderly default would shut Greek banks for days to
give the government time to prevent a bank run by reassuring depositors
that the lenders will not go bust.
At worst, if EU partners also pull the plug, Greece risks a chaotic
descent into an extended bank freeze, possible shortages of basic
goods, violence and what central bank governor George Provopoulos called
the "hell" of a euro exit.
"If banks were hit, I could not import goods any more. I would have
nothing to sell. How would I survive?" 66-year old shop manager Antonis
Broukias asked in his old-fashioned books and stationery store in
central Athens.
"I will surely shut down my shop, especially if we return to the
drachma," Broukias said, adding that he was worried protests could turn
violent.
The government and its private creditors are scrambling to avoid a
messy default that could drag the whole eurozone into a much deeper
crisis. But talks have stalled and the clock is ticking down to a major
bond redemption due in late March.
Even if a deal is struck, the country’s EU and IMF lenders have
made clear they will not sanction a 130bn euros bailout package unless
the government pushes through more budget cuts and implements a series
of long-agreed austerity reforms. If unimpressed, they could pull the
plug on aid at any time.
The fate of citizens and businesses if there is no deal with
private creditors, who are being asked to take hefty losses as part of
the new bailout, largely depends on whether the EU, European Central
Bank and IMF - tired with the government’s failure to meet reform
targets - would stand by Greece.
If they don't, people worried that the banks might shut or their
deposits could be turned into a new currency would likely rush to get
their money out, prompting a run on the banks.
That would be the first and most visible effect of a crisis that
would hit the whole country, which has just entered its fifth
consecutive year of deep recession and depends on external support to
stay afloat.
"Leaving the euro would be a disaster," said 73-year old pensioner
Petros Haris. "If you ever win the lottery, take it all out of the
country!" he said as one of Athens' many street lottery vendors walked
by.
His 30-year-old son, a lawyer who came back from France four years
ago to set up his own business, is considering leaving again, he said.
Euro exit?
Under the worst-case scenario, the state would struggle to pay pensions and salaries for its bloated public sector.
Greek banks - which hold around 45bn euros of junk Greek government
bonds - would need to be recapitalised, which would mean
nationalisation. After a default, they would likely be shut out of ECB
borrowing if the bloc's central bank stuck to its rules.
The financial system would freeze and could force the country,
which witnessed a strong economic boom when it joined the euro currency,
to seek an exit from the eurozone just a decade later, analysts say.
"If international lenders pull the plug, there will be a need for a
new currency because after a certain point the state would not be able
to function without printing money," said one Greek banking analyst who
did not want to be named.
"We would face circumstances similar to Argentina, there would be
lines outside banks the size of Florida ... It would be tough to stay in
the euro after a disorderly default."
Some argue that a euro exit would help the country regain its
competitiveness leaving it better off in the long run. But central
banker George Provopoulos has warned that a return to the drachma would
be a nightmare, with a devaluation of the new currency reaching 60-70
percent.
Schools, hospitals and other public services would face operational
difficulties during a transition period, Provopoulos said, warning of
possible shortages of imported goods including fuel, raw materials and
even agricultural products.
"If Greece leaves the eurozone, we'll be looking at a sharp
devaluation of the new currency and inflation is going to go through the
roof," said Diego Iscaro, senior economist at IHS Global Insight.
"If external funding collapses, they may not be able to pay for
imports, people may not be able to find basic products in supermarkets,"
he said, while it would take a long time for competitiveness to
improve.
A vast majority of Greeks want the country to stay in the euro,
although they are angry with wage cuts and tax hikes demanded by the EU
and the IMF in return for aid.
"Our life would be a lot worse if we left the euro. It would be
like going back to the 1970s, these were tough times," said Yannis
Korelis, 60, a public sector worker.
There would be practical problems too. Argentina kept the same
currency although it was sharply devalued. If Greece switched back to
the drachma, it would have to print it - the design, printing and
circulation of the euro took 2-1/2 years, Provopoulos said.
At the height of the Latin American nation's crisis, provinces
started issuing their own script currency to pay pubic employees. In
northern Greece, where unemployment is sky-high, some communities have
started using alternative currencies such as coupons to barter basic
goods or services.
"Anarchy" ?
In Argentina, the bank deposit freeze was the tipping point,
triggering mass violent protests. People took to the streets banging
pots and pans to protest against an economic collapse that plunged
millions into poverty. The government declared a state of siege and
presidents resigned one after another.
"It was really anarchy," said Iscaro, who now covers countries such
as Greece for IHS Global Insight in London but is originally from
Argentina and worked in a bank there at the height of the crisis.
"At the worst of the riots they tried to set the building on fire,"
Iscaro said. "People in a desperate position would come to the bank and
say: 'if you don't give me my money I will kill myself'."
In Greece, where people angry with austerity and record high
unemployment have protested almost daily and pelted politicians with
yoghurt and eggs, violence is a risk but it is very hard to predict how
bad it will be.
The country has a long tradition of street protests that can turn
violent - three died when a bank was torched down during an
anti-austerity protest in 2010 - but rallies have failed to attract a
strong turnout in recent months.
"What we have now is a typical case of manic depression," said
Yanis Varoufakis, economics professor at the University of Athens. "In
this situation you go from being catatonic – this is the stage we are in
now – to being extremely agitated and violent. Predicting the switch
from one state to the other is impossible for me."
It is the very prospect anarchy which means the rest of Europe is unlikely to turn its back completely.
To avoid this worst case scenario and the serious risks of
contagion to the rest of the eurozone it entails, the EU is more likely
to continue helping Greece and the ECB to support its banks, analysts
say.
"In the back of the mind of northern European decision-makers there
is always the fear of instability," said Guillermo Nielsen, who as
Argentine finance secretary led talks with creditors after the default.
"Greece plays very well the geopolitical card ... The rest of Europe will have to foot the bill," he said.
This would strongly limit the risk of a severe bank run, because
Greek banks would still benefit from the guarantee of the European
Central Bank's safety net.
"Watch the banks," said Nielsen. "If the Greek people move forward
without panicking and going for their money, you can handle it ... A
disorderly default, it's the bank run."
source Reuters
May 19, 2012 - 02:15
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