A self-inflicted default

Greece is on the verge of default. The International Monetary Fund on Wednesday declared a de facto default after the country failed to pay back 1.6 billion euros ($1.7 billion) it borrowed from the institution. Greece has no money left to repay the 3.5 billion euros in debt it borrowed from the European Central Bank. Though Greece made a plea for a third bailout, the European Stability Mechanism rejected it.

As Greece teeters on the edge of the abyss, the government shut down banks and the stock market. Prime Minister Alexis Tsipras decided to hold a national referendum on Sunday to ask if the country should succumb to creditors’ demands. If they say yes, the prime minister will resign, and if they say no, Greece will withdraw from the eurozone.

The world’s economic jitters are deepening. Irrespective of the results of the referendum, Greece will be forced to survive based on bailouts from the eurozone and international organizations. Market watchers predict a so-called “Grexit” sooner or later. Unfortunately, many debt-ridden countries like Italy, Portugal, Venezuela and Malaysia will likely follow in the footsteps of Greece. If the Greek crisis triggers a chain reaction among emerging economies, our economy will undoubtedly be affected. The government says the impact will be minimal because only $317 million in bonds are exposed to risk. But it is too early to be totally reassured.

Financial crises are very contagious. When the likelihood of a Gexit grew on Monday, it immediately led to the flight of foreign investment from our stock market, a weakening of the won and an alarming fluctuation in Chinese and Japanese stock markets. Our government must prepare for the worst.

The Greek crisis owes much to the Greeks. Despite a 310 billion euro debt - 1.8 times bigger than its gross national product - Greece failed to reform its deficit-ridden public sector. A monthly payment for 850,000 civil servants accounted for more than half its gross domestic product. When they retire at age 58, they received pensions amounting to 98 percent of their salaries on the job. The euro crisis in 2010 forced them to cut pensions, but that fell way short of creditors’ expectations. The jobless rate among the young is 50 percent.

The Greek crisis shows how dangerous it is to sustain welfare programs with borrowed money. Korea’s household debts have exceeded 110 trillion won ($98.2 billion). Its once-vibrant economy has lost steam due to a sharp reduction of exports and anemic domestic demand. The Federal Reserve plans to raise its lending rate fairly soon. Yet urgent structural reform is still far away in Korea. The government must watch the development in Greece and learn its lessons.

JoongAng Ilbo, July 2, Page 30