Default is not the answer!

OMAIRA GILLI

Argentina’s debt default should serve as a cautionary tale for other countries.

At the height of Greece’s financial troubles, the cry we heard again and again was that Greece should default on its debt. The explanation given was simple. Argentina had defaulted, and look how well they were doing now? Default was painted in a much more favourable light than austerity and all that comes with it.

Let’s not kid ourselves. The economic crisis in Greece has been terrible. Without exaggeration, and you know that we in Greece love to exaggerate, the crisis has broken up families, imposed poverty on thousands if not millions and even caused deaths. Yet the alternative, defaulting and returning to the drachma, was always a much worse alternative.

No matter how bad things got, right in the middle of the crisis, public opinion polls kept reporting that despite all the agony, the majority of Greeks still supported their inclusion in the Euro. Whether they should have been let into the Euro in the first place is another question, but that was someone else’s mistake so not for us to dwell on, and after all, it’s now clear that the Euro is the Hotel California of currencies. You can check in any time you want, but you can never leave.

At the time of the crisis, I was working for an investment bank and would get into conversations with some of the analysts. They were adamant that Greek would default on its debt. Living in Greece and observing the climate around me, I was equally adamant that this wouldn’t happen.

There were points in the crisis when the pressure was on from all sides. So-called experts predicted that by the end of the year (nearly every year since 2010) Greece would have defaulted and exited the Euro. Some were foreboding about this. Greece would be ruined. Nothing would ever be the same, woe is Greece. Others more upbeat. Why not default? Why not start afresh with a newly valued drachma? Greece after default had potential. It could only go up. It worked for Argentina, it would work for Greece too!

They forgot some tiny details in the “Default and start over” argument. First, Argentina is a much larger economy than Greece, with a much larger export sector. Greece is not. Greece, in real terms, doesn’t produce much.

Greece’s GDP is made up of roughly 80% from the service sector, 16% from industry and around 4% from agriculture. Tourism is one of the country’s main sources of GDP. If Greece defaulted, they were supposed to follow Argentina down the yellow brick road to economic regrowth, export riches and a rosy future with what, exactly? Watermelons? Holiday packages in Corfu?

In Argentina, manufacturing is the greatest source of value added to the nation’s GDP at 16%, followed by tourism at 14% and retail at 13%. The economy grew 4.3% in 2013. In Greece, the economy shrank 4% in 2013.

Argentina’s first default was heavily sold by those with an interest in Greece defaulting, namely hedge funds. Hedge funds are the cowboys of the financial world. By choosing which way to bet on the market, they make money during bad economies as well. It’s easy to forget that while Greece was being ripped to pieces in the bond market and had its economy shrink some 23% between 2008 and 2013, someone somewhere got very rich.

Which brings us now to Argentina. It all seemed to be going so well, so what happened? Like a bad smell, a debt default will follow you around. In technical terms, Argentina didn’t default off its debt, it was forced to do so by a judge in New York who wouldn’t let it pay its bondholders until they also paid the hedge funds that had positions on the previous default.

It sounds complicated, and it is, with echoes of a very familiar story being written thousands of kilometers away on the other side of the globe with a much smaller country. Angry bond holders, circling hedge funds waiting for the prey to trip and fall and calls for default.

In Greece’s case, holding out so far against all the odds might not have made for the most glamorous choice, but it held true to the current global climate of making do and mending what you have. That extends to the economy as well.

Argentina’s experience should be a cautionary tale to anyone who is so quick to whip out the default card in the future.