Greece won’t go Argentine

By Felix Salmon
April 9, 2010
Landon Thomas today, in the lead story on, comes out and uses the A-word with respect to Greece:

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Landon Thomas today, in the lead story on, comes out and uses the A-word with respect to Greece:

The sharp rise in rates has spurred increased talk of some form of debt restructuring. In such a situation, analysts said, holders of Greek debt could perhaps be forced to accept a loss of 20 percent or more on their bonds. That would be similar to what happened after Argentina defaulted on $93 billion in debt in 2001. Like Argentina, Greece has suffered from a fixed currency, fiscal deficits and a growing lack of industrial competitiveness.

OK, hang on a minute here. It’s bad, but it’s not that bad. Paul Krugman says that “there are no good answers here — actually, no nonterrible answers”, but at the same time I don’t think anybody’s seriously expecting Greece to go Argentina.

There are two outcomes which no one wants in Greece but which are still becoming increasingly likely: default and devaluation. Argentina did both in 2001. But these aren’t binary things: both can be relatively mild or extremely severe. In Greece’s case, they would surely be much more modest than they were in the Argentine.

The first option is default. If it happens, it’ll happen, as Thomas says, in the form of a debt restructuring, where holders of Greek debt would end up getting new bonds with new terms — lower interest payments, lower principal amounts, that kind of thing. Debt restructurings are messy and unpleasant things at the best of times, but what we’re really talking about here is the sovereign equivalent of a loan modification which, if it goes according to plan, makes both the borrower and the lender better off.

What we’re most emphatically not talking about here is an Argentina-style default, where the country simply unilaterally stops paying any interest on its debt, and then takes years to address the issue, trying to drive the hardest bargain it can all the while.

Then there’s devaluation. If Greece leaves the euro, that would allow it to devalue its currency. If it redenominated its debt from euros into drachmas, that alone would constitute a default, even without a bond exchange. But again, in the event that Greece did leave the euro, it wouldn’t see its currency plunge overnight to a third of its previous value, as Argentina did.

This is where being a member of the EU really does help — not least because of the large exposure that many European banks have to Greece. Even if Germany insists on a hardline refusal to bail Greece out, it equally doesn’t want a Greek failure to be the just the first of the PIIGS dominos to fall, in a series of sovereign collapses which would make the 1998 Asian crisis look positively tractable in comparison. As a result, even in the worst-case scenario, the EU and IMF are at least likely to step in somewhere to cushion the blow and to try to isolate Greece’s problems. What happens in Athens must stay in Athens: if it spreads to Rome and Lisbon and Dublin and Madrid, London would probably be next, and at that point we’d have a major global financial crisis at least as severe as the one we just went through.

So while it’s true that, as Mohamed El-Erian says, things will likely get worse for Greece before they get better, it’s worth being a little bit realistic here about just how much worse they could possibly get. For the time being, everybody’s still hoping that Greece will somehow manage to get through this crisis — and Greece’s debt spreads, while wide, aren’t yet trading at distressed levels. That’s grounds for hope. And it’s also an indication that traders see much less downside here than there was in Argentina.


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“what we’re really talking about here is the sovereign equivalent of a loan modification which, if it goes according to plan, makes both the borrower and the lender better off.”

When a lender (like the local customer owned savings bank I happily work for) does a loan mod 99% of the time they are doing that because payments are not being made. Some money is better than no money and so loan mods are going to be better than alternitives.

Holders of Greek debt are currently being paid. It’s a heck of a stretch to tell someone that 80 cents is better than a dollar, that their 5 year bonds are now 15 year bonds, or that their 5%’s are becomming a 4%’s

What I would love to see from you would be a contrast between Greece and the UK or the US. What %of GDP do they spend on goverment and what % do they collect in taxes? Here in the states that spread is getting wider than many think prudent.

Keep up the great writing!

Posted by y2kurtus | Report as abusive

Do traders trade on the basis of whether Greece will default? Or on whether perception of the risk of Greece defaulting will increase?

Posted by wpw | Report as abusive

The logic here is sound in a world where one can identify and isolate the risks. The consequences of whatever action is taken with Greece are hardly known however. Minimizing those risks begins to sound eerily familiar to me as the same language used when delinquencies and defaults were spiking higher on subprime mortgages. “It’s a relatively small exposure to the larger market…”, “The risks are isolated and contained…”, “We do not see any evidence of contagion from subprime fallout…”

The sandpile will shift and no one can be quite sure what the implications will be. Given that fact, global risk premia appears to be severely mispriced here. Memories are short.

Posted by z4ujxs | Report as abusive