We hold these truths to be self-evident:
- Greece is bankrupt.
- Greece will eventually default.
So what will happen then?
There’s no perfect historical precedent, mostly because of Greece’s inability to devalue its currency in conjunction with a default. But the Argentina default in 2002 does shed some light on what we have to look forward to.
Richard Thies at Northern Trust offers an excellent snapshot:
In the world of sovereign debt settlements, things have come a long way since Peru settled its 1889 default in part by offering creditors two million tons of guano. While making a great fertiliser, investors were understandably a little disappointed with this outcome. Luckily, the era of debt-restructuring via barter is long past and in its wake settlement terms and processes have rapidly evolved. The largest sovereign default in history, Argentina’s in January 2002, is very close to being settled just 8 years and 5 short months later. Looking at the recent history of sovereign defaults gives some clues as to the outcome of a possible Greek restructuring/default, were it to happen, but leaves many questions unanswered.
Intuitively, the Argentina default is the most instructive for the current situation as it is both the most recent debt collapse by an industrialized country (last year’s Jamaican default didn’t attract much fanfare) and the largest in history at $82 billion. For comparison, Greece will need to roll-over roughly €104 billion ($130 billion) between now and 2013, which does not include additional deficit-financing as needed. Regardless, the scope is comparable. Despite the similarities, the ongoing Argentine restructuring process has been unique, though some of the idiosyncrasies of the process do shed some light.