Greece: a portrait of collapse

Nightmare of disorderly default focuses minds on Greece

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.

Reuters,

27 January, 2012

At best, if private creditors walk away from a voluntary debt restructuring, a disorderly default would shut Greek banks for days to give Athens 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.

Athens and its private creditors are scrambling to avoid a messy default that could drag the whole euro zone 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, Greece's EU and IMF lenders have made clear they will not sanction a 130 billion euros bailout package unless Athens 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 Greek people 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 Athens' 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 of about 11 million people, 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, Athens would struggle to pay pensions and salaries for its bloated public sector.

Greek banks - which hold around 45 billion 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 Mediterranean country, which witnessed a strong economic boom when it joined the euro currency, to seek an exit from the euro zone 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 Greece 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 euro zone, 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 70's, these were tough times," said Yannis Korelis, 60, a public sector worker.

In the 1970s, large parts of Greece were very poor and tens of thousands left to seek a better life abroad.

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 stage 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, professor of economics 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 euro zone 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."