Argentina Shows Greece The Way; Default Is the Beginning, Not The End

Greece’s crisis began five years ago, and Europe apparently decided to give them a hand. This was not real assistance, however, as Germany and other “rescuers” actually made a profit out of Greece’s distress, charging a far, far higher interest rate than their cost of capital. In finance, a higher interest rate is charged for riskier investments, but if the EU really wanted to help, they would have lent the money to Greece at a rate that they could afford, instead of attempting to enslave them with austerity and unpayable debt.

They imposed these conditions knowing full well that Greek could default; it was their excuse for charging sky-high interest after all. That they act all surprised and anguished

Greece did everything that was demanded though; but none of these austerity policies worked, seeing as they were designed to profit banks rather than inculcate healthy growth. And let me remind you, the terms offered Greece were far more onerous than those offered to our own bailed-out banks…. Who soon went back to paying multi-million bonuses.

At last, after years of blackmailing Greece and demanding ever more austerity that led to a catastrophic economic depression, the Troika has finally pushed the country into the brink of default.

Argentina has faced this crisis before. And it has survived.

In both countries, recessions turned into depressions as a consequence of austerity policies,; squeezing money out of a country seems to leave less of it to actually grow an economy.  Both countries had rigid currency arrangements that did not allow them to print money to pay off the debt. In both countries, the IMF got it wrong, providing flawed “forecasts” of the consequences of the imposed policies, that flew in the face of “doom and gloom” economists. Unemployment and poverty soared, and GDP plummeted.

In Argentina, youth unemployment in particular skyrocketed and stayed high for several years. The lack of opportunities destroyed motivations and was an immense waste of the talent of millions of young people. With youth unemployment at about 50 percent in Greece, a similar saga is going on.

Defaults are horrible, but no worse than austerity has been. At least with default, you regain control over your own economy. The good news for Greece is that, as Argentina showed, there may be life after debt… and default.

Defaults don’t mean that a country needs to renege on the entire sum it had borrowed. Rather, agreements and restructuring of the debt means better terms can be negotiated with creditors desperate to get their money back. Bad management of debt crises, such as demanding austerity policies during recessions inevitably leads to larger losses and more suffering. In Argentina, restructuring the debt and imposing  haircuts (creditors willingly take a chunk of their debt out of the equation) reduced the burden to the people.

Those who get saved by their interest-free bailouts (as the German and French banks in the case of Greece) usually give moral hazard as the reason to avoid debt restructuring. They claim that it would create perverse incentives; other debtors would be more inclined to “abuse” borrowing by not repaying. Moral Hazard is more applicable to the bankers who were bailed out without consequence, as both Argentina and Greece had already paid a very high price for their debt problems by the time of default. It is unlikely any sane country would purposefully decide to follow their example.

When debt is unsustainable, there needs to be a fresh start. This is a basic, well-recognized principle. So far, the Troika is depriving Greece from this possibility. And there can’t be a fresh start with austerity.

This Sunday, Greek citizens will debate two alternatives: austerity, debt and depression without end, or the possibility of deciding their own destiny in a context of huge uncertainty. None of the options are nice. Both could lead to even worse social disruptions. But while with one of them there is some hope, with the other there is none at all.

The problem of debt cannot be cured with more debt, nor can it be cured by austerity.

This false dichotomy excludes The Default choice which is the best they have.

This Article (Argentina Shows Greece The Way; Default Is the Beginning, Not The End) is free and open source. You have permission to republish this article under a Creative Commons license with attribution to the author and AnonHQ.com.