Talk of orderly Greek default is wishful thinking

BERLIN/BRUSSELS Fri Sep 16, 2011 10:56am BST

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BERLIN/BRUSSELS (Reuters) - Some politicians in Europe air the view that an "orderly" Greek debt default should be discussed, but history suggests it would be a very messy affair unless euro zone leaders agree to make preparations and ring-fence the banks.

Commentators who favour a default for Greece, believing other options just delay the inevitable, often cite Argentina's default in 2002 -- and subsequent strong economic growth -- as an argument that it need not be too painful.

"If Europe is taking us as an example, they must be in even more trouble than I thought," observed economist Aldo Abram in Buenos Aires. He recalled that the president who declared the biggest sovereign debt default in history, Adolfo Rodriguez Saa, lasted a week and was one of four presidents in a month.

If Greece follows Argentina's desperate path of devaluation and abrupt debt default, said Abram, "they will be condemned to poverty and will see their banking system destroyed".

European leaders are adamant that Greece will not default, let alone leave the euro zone, and want parliaments to ratify a second bailout package for the debt-laden country which has so far failed to deliver on reforms set as a condition for aid.

A souped-up European Financial Stability Facility (EFSF) with the involvement of private-sector creditors and the more permanent European Stability Mechanism (ESM) taking its place from mid-2013 are meant to fend off any need for restructuring.

But with Greece failing to meet the European Union and International Monetary Fund's terms for bailout, German Economy Minister Philipp Roesler has suggested lifting a "taboo" on talking about an "orderly bankruptcy".

Roesler, the young head of a small party in the ruling coalition trying to boost its fortunes by talking tough on the euro, was rapped on the knuckles by Chancellor Angela Merkel.

But the default scenario refuses to go away and neither those who oppose it nor those who see it as inevitable seem convinced it will be particularly civilised.

"Greece has to default," said Kyle Bass, managing partner of Hayman Capital, on CNBC television, adding: "The world seems to think they're going to have an orderly default. I've never seen an orderly default."

"I know of no example in human history of a state defaulting in an orderly fashion," said Michael Meister, a senior lawmaker from Merkel's conservative bloc. "When you use such vocabulary, you simply increase the risk of such an uncontrollable, disorderly process occurring."

"What would happen to countries like Italy, Spain and France if we admitted a Greek default in an uncontrolled way?" asked Peter Altmaier, conservative leader in the Bundestag.

BE PREPARED

The answer from proponents of a default -- who include Argentina's central bank chief from the crisis, Mario Blejer, Nobel economics laureate Paul Krugman and billionaire investor George Soros -- is that not preparing for it is even riskier.

"In these circumstances an orderly default and temporary withdrawal from the euro zone may be preferable to a drawn-out agony. But no preparations have been made," Soros wrote in a column for Reuters.com.

Europe should ready for a default and euro exit not just for Greece but also Portugal and perhaps Ireland, Soros said, by taking measures to protect banks and deposits and to stop contagion to the sovereign debt of other euro zone states.

In Argentina's crisis 10 years ago, it was speculation that a decade-long currency peg to the dollar would end that caused a bank run, leading a weak government to take the desperate and disastrous step of blocking savers' access to their money.

Argentina's default came after devaluation rather than before, and although subsequent Peronist governments have seen strong growth based on surging commodity prices, it was not until 2005 and 2010 that it managed large debt-swap deals. Argentina is still excluded from international debt markets.

In Greece's case, with Europe stubbornly ruling out its exit from the 17-nation euro zone, the worst-case scenario is that an unprepared default would be followed by devaluation, which Meister in Berlin warned would be "absolutely fatal".

Greece does not have soybean exports to help it grow out of trouble, devaluation would make imports prohibitive, a default would dry up credit and domestic demand would shrivel.

"To talk of an orderly sovereign default is misleading. Certainly for the country itself it would spell economic chaos," said Joerg Kraemer, chief economist at Commerzbank.

Abruptly announcing a default like Argentina would carry "the risk of hundreds of lawsuits", cautioned Carsten Brzeski, an economist at ING, but "if you sit around the table with all the bondholders, including banks and hedge funds, then it could go on for weeks, meaning weeks of uncertainty and contagion".

Jean Pisani-Ferry, director of the Brussels-based Bruegel think-tank, called Greece's situation precarious and said any default would likely be disorderly, putting "into question the viability of a country staying in the euro area".

Aldo Abram said Europe would be well advised to study the Uruguayan voluntary debt swap of 2003, when it extended debt maturities and got 90 percent take-up. Argentina's neighbour regained access to international debt markets the same year.

Such an approach would require someone to acknowledge that Greece cannot meet its obligations. For the time being, Europe continues to urge Athens to meet its reform commitments, while the rest of the world prays that the strategy works.

(Additional reporting by Adrian Croft in London and Andreas Rinke in Berlin; Writing by Stephen Brown; editing by Janet McBride)

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