Athens rehearses the nightmare of default

By Joshua Chaffin in Athens

Constantine Michalos, president of the Athens chamber of commerce, sat in his office - around the corner from where protesters were hurling chunks of marble at riot police - and contemplated what was once unthinkable: that Greece would default on its debt and then be forced into a messy exit from the euro.

"AII hell would break loose;" Mr Michalos said , sketching a society that would quickly run short of fuel, food, medicine and necessities. "VOu would have social upheaval."

Since the crisis began, it has been widely held that a default would prove disastrous not only for Greece but also for the entire European Union, and that it was to be avoided at ali costs.

That assumption is being questioned as never before. Some officials argue that the blowback from a Greek default might not be so debilitating, after alI.

"I am not advocating a Greek default, hard or soft - but I'm not excluding the possibility of it if the f Greeks don't get their acts together, Europe is prepared... I think we've taken the necessary measures." Alexander Stubb, Finland's Europe minister, told the Financiai Times.

That view is by no means unanimous among Greece's creditors. François Fillon, French prime minister, bn Friday had a stinging rebuke for those who would consider it. "To put in play the default of Greece is completely irresponsible," he told broadcaster RTL.

Stéphane Deo, European economist at UBS, warned that a Greek default could wreak havoc across the continent, including bank runs.

In rumour-prone Athens, business leaders, politicians and economists are aghast at open discussion of default. "It would be a nightmare," said Vannis Stournaras, head of the Foundation for Economic and Industrial Research, an Athens think-tank. "Vou would see serial defaults ... Banks would collapse completely. There would be no banks."

An important factor in any default would be the reaction of the European Central Bank. It might be possible to keep Greece in the eurozone an contain the damage if the ECB were to provide a lifeline to the country's banks, some analysts believe.

But it is also possible Frankfurt would decide it could no longer accept Greek government bonds as collateral. Without ECB liquidity - cut off from financial markets - Athens would have to print drachmas to pay its bills.

The new currency would plunge in value against the euro. That would trigger another wave of defaults for businesses and citizens, unable to pay outstanding debts in euros. Litigation, and even deeper recession, would probably ensue.

Platon Monokroussos, research head at Eurobank EFG, believes a Greek default might even cascade into a full-blown EU exit, beca use government would probably try to impose capital controls, close borders and take measures that violated EU law.

Greece's mainstream politicians appear aware of this. Lucas Papademos, the prime minister, warned MPs that the country faced "catastrophe" if it did not approve a sweeping austerity package tied to the loan.

Opinion polls show more than 70 per cent of Greeks determined to remain in the eurozone despite enduring two years of austerity and economic contraction.

However, there is a minority - particularly on the far left - that wants out. Their chief argument, endorsed by some well-known foreign economists, is that a devalued drachma would lower wages and instantly make Greece more competitive.

They tend to point to Argentina, which broke its \Iif peg with the dollar more than a decade ago, defaulted on its foreign debt and has since fared far better than many expected.

Yet that comparison overlooks the fact that the Greek economy - unlike Argentina's - boasts a small production base and few exporters. Most of its companies rely on imports, which would rocket in cost. Sceptical, too, are ordinary citizens. "We are not Argentina," Mr. Stournaras said. "We are not even self-sufficient in agriculture."

(Adapted from: FinanciaI Times http://www.ft.comjintljcmsjsjOj76d064c6-5992-11e1- 8d 36-00144 fea bdcO. htm I#axzz 1 m I F7WITI)