MercoPress. South Atlantic News Agency

A Uruguayan debt ‘profiling’, an option to help Greece avoid defaulting

Lee Buchheit: “a classic case of a country that did the right thing”

With Greece on the precipice of financial collapse and a full Euro confidence crisis looming while EU leaders can’t agree on the next steps, the example of Uruguay in 2002/03 stands out as a successful smart way out of the crisis that spilt over from neighbouring Argentina.

Greece needs a 17 billion infusion from the EU and the IMF by mid-July or it risks going into default, the Euro zone's first. Experts say the country's options are limited and that default could produce something resembling panic.

“You would see a run on the banks, I think,” said Lee Buchheit, a partner at Cleary Gottlieb Steen & Hamilton who advised Uruguay during a similar financial crisis.

Economists say bank lending could grind to a halt and that Greece — or perhaps the whole EU — could be thrust into a double-dip recession.

For all the scrambling, there's little surprise that Greece stands on the precipice: Athens turned to the IMF last year for a line of credit to pay bondholders, and the country has been in default more often than not during the past two centuries.

In fact, what could be considered the first sovereign debt default took place in Greece in the fourth century B.C. when municipalities in the Attic Maritime Association missed payments to the Delos Temple, according to the IMF.

But Uruguay, which nearly defaulted in 2003, became a “classic case of a country that did the right thing,” Buchheit said.

Before it missed any payments, Uruguay went to its creditors and worked out a plan to extend the terms of its loans for a few years, an adjustment known as re-profiling. Within a few weeks, the country was back on firmer financial ground.

“Officials in Uruguay said, 'Look, read the numbers and you will see that we run out of gas very soon unless we can move this debt stock down the road,' ” Buchheit said.

But Greece is no Uruguay. For one thing, Uruguay, like other countries, devalued its currency as a way to recover its competitiveness and export revenues. A cheap currency makes goods produced in a country easy for other nations to buy.

“The Greeks can't do that because they're in the EU monetary union,” Buchheit said. Non-EU countries can just print more money, but Greece doesn't have sole control over the Euro printing press.

To make exports cheaper, Greece would have to lower wages, reduce pensions and strip away subsidies — deeply unpopular moves that have resulted in social unrest and austerity strikes. But even if Greece finds the political will for such severe cuts, it won't come soon enough to guarantee that Athens won't miss a payment on its sovereign debt.

Experts say Greece essentially has three options: a full-on default in which the country misses a payment to creditors; a structured default a la Uruguay, where terms of loans are extended or profiled; or yet another bailout that allows Athens to keep paying on its obligations on the current terms.

Most economists think the bailout option is the only realistic scenario if the EU is to avoid a contagion effect that could further weaken strapped Euro zone economies such as Italy, Ireland, Portugal or Spain.

Even if Athens gets another bailout instalment and pays maturing bonds on time and in full, it's not off the hook because it will still have to dig deep to pay back the EU and IMF. However the good news for Greece is that if it can manage to get its fiscal house in order, debt markets are likely to be “extraordinarily forgiving” said Eswar Prasad professor of trade at Cornell University and a senior fellow at the Brookings Institution.

“Many countries have been able to get private financing just a couple of years after defaulting: Argentina, Russia,” he said. “But they had to restore competitiveness and get back to decent growth for that to happen”.