Greece moves to Latin America

As Greece is heading to a third bailout, it is becoming clear that the financial troubles of the Greeks are now chronic. The permanent aura of crisis that has permeated the Hellenic country since 2009 creates an unfortunate parallel with the context of chronic crisis that hampered economic prosperity in most Latin American countries during the 1980’s and 90’s.

After several attempts to rescue Greece, the country remains insolvent, with little prospect of carrying out important economic reforms. Although the bailout comes with requirements for structural reforms, Greek politicians lack the political credibility to implement such reforms, thereby increasing the risk of defaulting in the near future.

The lethargy that Greece is showing to resolve its economic crisis echoes the financial troubles of Latin America in past decades. Throughout the 1980’s, during the so-called “Lost Decade,” most Latin American countries endured repetitive financial crises, and the international rescue packages did little to remedy the prolonged insolvency that pushed the region to the edge of a default and to an extended period of sluggish economic growth.

The similarities are many in today’s Greece and the Latin America of three decades ago. First, the responses to the crisis in Greece are erratic and not enduring. Since the first bailout in May 2010 to the current one, the requirements attached to the financial rescues are too ambitious in the face of the Greek government’s capacity to implement them. This means that Greece will remain illiquid with the third bailout, despite hopes that the new rescue package will bring back liquidity. Just like in Latin America of the 1990’s, when improved access to capital markets was not the solution to financial instability, in today’s Greece, the eurozone’s latest rescue cannot remedy the structural weaknesses of the Greek economy.

Second, Greece’s indebtedness is a notorious challenge to overcome, as the government’s debt is one of the highest in the world. In May 2010, the Greek deficit was 15 percent of the GDP and public debt reached 120 percent of the GDP. Five years after the first bailout, public debt is currently 180 percent of national income, and it is predicted to rise to 200 percent by 2017. High indebtedness will keep Greece on the brink of insolvency, especially knowing that in the eurozone, there is little possibility of substantial debt restructuring in the near future. In the 1980’s, several Latin American countries suffered from debt overhang, with negative consequences on growth and high costs to access to financial markets. The debt restructuring programs that several Latin American economies implemented in the 1990’s gave them only slightly better access to the financial markets.

Lastly, the implementation of austerity measures comes with political backlash. Each bailout in Greece follows abrupt political changes and turmoil. In the case of the third bailout, there are already signs of fracture in the political coalition behind Prime Minister Alexis Tsipras. The parliamentary approval of the bailout obtained on July 20th was passed without the support of several members of Tsipras’ own political party. This happened amid growing popular discontentment with Tsipras’ disregard for the results of the referendum on July 5th, when 61.5 percent of Greeks showed disapproval of imposing any austerity measure. Most Latin American countries in the mid-1990’s pursued aggressive structural reforms under the so-called Washington Consensus. Although these reforms became an important foundation for a period of high growth and economic stability in the 2000’s, they failed to alleviate the economic distress and social inequality that later resulted in an era of left-wing populism.

What does the path ahead look like for Greece? A crisis-free Greece is a choice that Greeks have; however, this requires commitment to the rules of the international financial community. Ireland, the second eurozone country after Greece to receive a bailout, is a good example of how compliance to austerity norms shows positive results. In 2011, Ireland ranked amongst the 15th most competitive countries in the world. It grew 4.8 percent in 2014 and is expected to grow 3.5 percent in 2015, mitigating the decline of a high government debt-to-GDP ratio.

Clearly, Greece is not following the Irish path to recovery; instead, it is taking a tortuous pathway resembling that of Argentina in 2001, when the then third-largest Latin American economy chose to default on its debt and impose capital controls. As Argentina has taught us, even when a once prosperous country fails to meet its international financial obligations, international ostracism is the end result.

Bailing Greece out for the third time is the last attempt to prevent the country from fully embarking on the long journey to international financial ostracism. This third bailout, however, looks more like another event in an extended crisis punctuated by miscalculations and opportunism.

*The author is professor and director of the Department of Latin American Studies at Hankuk University’s Graduate School of International and Area Studies.

by Helder Ferreira do Vale