Dear Greeks, there is life after default - just ask Argentina

Dear Greeks,

Instead of trying to peer into a crystal ball to catch a glimpse of your future, you might want look back at what happened in Argentina a decade ago when its economy, like yours today, lay in ruins.

But please, don't cry for Argentina. The Argentine economy is doing well these days. It grew by a blistering 9.2 per cent last year.

Today, it is you who have much to cry about.

Like the Argentines, you have borrowed heavily to stave off the worst. Like them, you may now be running out of time.

Your European Union partners have grudgingly pledged billions of euros more to help keep you afloat. But many believe that will not be enough, and what happens after the "crisis meeting" this weekend on your second bailout package will put all this to the test.

Euro bloc leaders, from mighty Germany's Chancellor Angela Merkel to tiny and poor Slovakia's Prime Minister Iveta Radicova, had to put their jobs on the line to get the new bailout package as far along as they have. And they're not likely to want to do all that again.

In fact, having come to your rescue could still cost them their jobs in the next elections.

Sovereign default

If this current pile of money should not be enough to put your economy back on its feet again, you may find yourself, as Argentina did in 2000, left out in the cold.

That cold place is called sovereign default. In plain English, going bust, telling your creditors that you are not going to pay them all the billions you owe.

It doesn't quite end there, of course.

You wouldn't want to remain an international pariah forever. So you would have to renegotiate your debts, usually by promising to repay a fraction of what you owe — maybe two or three dimes on the dollar — often with bonds that come due many decades from now.

While that would solve the immediate, crushing problem, it will likely leave you shut out of borrowing in international capital markets.

That means your industries will find it very difficult to raise money from foreign investors to fuel a recovery and will have to rely on their own resources.

Currency 'reform'

Now, I know that this inability to pay is not entirely a new phenomenon for you. In fact, you had history's first sovereign default 2,400 years ago when 10 Greek cities walked out on their debts to the Temple at Delos.

If you defaulted now, you would be setting another record: the biggest insolvency by a government — five times the size of Argentina's.

But take heart. That may not be as bad as it sounds. When the Argentines defaulted they were in much worse shape than you are now.

Argentina had been going downhill for decades. It had a military dictatorship with a murderous record of atrocities that was trying to live down a disastrous war with Britain over the Falkland Islands.

The Argentine economy was devastated by hyperinflation, which exploded to nearly 5,000 per cent at one point in 1989. The government tried to ride it out by currency "reform."

In the 1983 currency reform, a new peso was exchanged for every 10,000 old pesos. In 1985, a new currency called the austral was brought in and exchanged for 1,000 of the new pesos. In 1992, the austral was phased out and another new peso was exchanged for every 10,000 australs.

In short, a fortune of 100 billion pre-1983 pesos, which no one actually had, would, a decade later, have been reduced to one measly new peso. 

To strengthen the new peso. Argentina pegged it to the U.S. dollar. But the one-to-one exchange rate proved to be a ball and chain (much as the euro is to you these days).

So the Argentines let the peso float, which set off a wild run — banks were closed behind steel barriers and customers were only allowed to withdraw small amounts on a weekly basis.

So beware, my Greek friends, of abandoning the euro or being forced to abandon it. It might make a bad situation worse.

The good life

Unlike Argentina before its default, you, my Greek friends, have had a very good time since you joined the EU a decade ago.

You have one of the highest living standards in the world. In the UN's Human Development Index you stand ahead of such countries as the U.K., Austria and Italy.

Given those advantages, you should have a much easier time recovering than the Argentines had.

The bad news, though, is that you may have had too good a time, that you may have lived too high off the hog and now the bills are due.

It won't be easy. Your whole economy is skewed.

Your service sector accounts for nearly 80 per cent of GDP. Half of that is the public service supported by taxpayers, all too many of whom have notoriously avoided paying taxes. Another quarter comes from tourism, which has fallen drastically.

Not a pretty picture

Looking back, it's easy to understand how Argentina turned things around as quickly as it did. It had always been a huge exporter of agricultural products like wheat, beef and soybeans. And now with the rise of China, India and Brazil, the demand for these products has grown substantially.

On top of that, Argentina has also become an exporter of motor vehicles, metals and minerals. Its trade surplus last year was nearly $10 billion.

It took a few years, but the down-at-the-heel Buenos Aires of a decade ago is once again a world-class city bustling with development. La buena vida, the good life has returned to Argentina.

Dear Greeks, may you too find your way back to the good life. The world wishes you well not just for your sake. But because we have all just begun to realize how our own economic futures may depend on yours.