Bloomberg
December 6, 2011
The inevitable is finally happening. Although new uncertainties tend to replace old ones -- the focus has shifted to Italy’s troubles in the past few weeks -- Greece is going through a default.It’s likely that this process will be guided by the broad outlines of an agreement reached between the European Union and Greece in October, although the details are probably subject to change.
As part of that accord, Greece and its private creditors have been invited to implement a bond exchange with a nominal discount, or haircut, of 50 percent of face value. Even though acceptance of the invitation is portrayed as voluntary, this agreement is, in all but name, a default, and for practical purposes should be consider as such.
Many comparisons have been made between Greece and Argentina, and now that default will be another common feature, we believe there are two distinct -- often overlooked or misconstrued -- lessons from the Argentine precedent.
The first has to do with the timing and size of the debt exchange. In this regard, Argentina’s lessons are clear: Delaying the unavoidable and then defaulting belatedly, unilaterally and in a disorderly fashion, imposes significant costs in real activity, with no visible benefits. True, markets need to see some pain to be convinced of a country’s willingness to pay, in order to accept a default. But Argentina, like Greece now, went way beyond that. By the time Argentina defaulted in 2001, it had experienced four years of recession and its gross domestic product had declined by about 22 percent. How much pain should Greece endure?
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