History lessons
Greece not the first to go down this road.
OTTAWA • Well before Greece took centre stage, there were other financial crises that grabbed the global spotlight. And the plot lines were disturbingly similar.
For many Greeks, the real possibility of the country defaulting on its debt payments, or at least going into arrears — and, subsequently, exiting the European Union — may be unthinkable.
But that hasn’t prevented the governing party from balking at a US $8.1billion reform-dependent bailout and pushing ahead with a July 5 referendum that could end up being just that: unthinkable.
For instance, there have been concerns that a breakaway by Greece could, in a worst-case scenario, also fan fears of a contagion of defaults and EU exits. Still, that’s unlikely to happen any time soon.
“The other peripheral economies are generally in much stronger shape than even two years ago,” said Douglas Porter, chief economist at BMO Capital Markets.
The more likely scenario is that Prime Minister Alexis Tsipras and his radical left Syriza party will lose the vote. They would then find themselves going hat-in-hand back to the negotiating table and asking favour more favourable lending terms from the EU and International Monetary Fund.
Or Tsipras could simply call another national election and roll the dice in the hope of getting a stronger exit mandate.
“The reality is nobody can make an assertion about how things will unfold in the coming days. The situation is highly unpredictable,” said Benjamin Tal, deputy chief economist at CIBC World Markets.
“Until a few days ago, the consensus was that Tsipras was playing a game here and that, given his reputation, he would wait until the last minute to sign something. Now, the market is not so sure.”
But Greece — and the rest of the nervous world — can look back with a bit of hope at other countries, and entire regions in some cases, that returned from the breach and survived, if only gradually and perhaps still tentatively.
In each case, it was the IMF that played the role as rescuer of last resort.
❚The Thailand-led financial collapse in 1997, triggered by a plunging currency and huge foreign debt, spread quickly to other parts of Asia and persisted for more than two years — engulfing Indonesia and South Korea, and strongly impacting Hong Kong, Malaysia and the Philippines. Singapore and Taiwan, however, were relatively unscathed by the meltdown. A US$40-billion rescue from the IMF certainly helped those Asian counties in their recovery, which took hold in 1999.
❚Argentina’s frenzied default and currency crisis continued to be felt for years. Following the Asia contagion, the country experienced its own financial collapse and devalued the peso in response. As markets also plunged, Argentina sought funding help from the IMF. The economy eventually recovered in 2003, as did the peso and the markets.
❚Ireland, which succumbed to the gathering global financial crisis, and sought and received a major bailout from the EU and IMF in 2010. Unlike other regional crises, Ireland’s demise was the result of guaranteeing two years earlier to backstop its six biggest banks during the housing bubble. The economy tanked and jobs evaporated. But by 2013, Ireland was standing on its own feet again.
“Ireland is the poster child of the bailout countries, and is now in full recovery mode,” said BMO’s Porter.