Money & Banking

The cost of default: Greece set for tough decisions ahead

NS Vageesh Mumbai | Updated on January 24, 2018

BL14_Euro_sign_gold.jpg   -  tuulijumala/

It is a distant memory now. But, the sight of a beleaguered Greek PM, negotiating with creditor nations to stave off the prospect of a total collapse, would have reminded many of how close India was to a similar situation.

It was the troubled days of 1991 as India tottered both politically and economically. India had two successive weak governments from 1989-91. The economy had been battered by the oil price hike following the first Iraq war, collapse of export markets following the fall of the USSR and unsuccessful price control attempts by the VP Singh government.

The successor government of Chandra Shekhar rested on shaky foundations. India was headed for a balance of payments disaster and our forex reserves were down to even less than a billion dollars by the summer of 1991.

RBI’s struggles

It was left to the Reserve Bank of India to do the heavy lifting. The then RBI Governor S Venkitaramanan and some top finance ministry officials went across to various top central banks of the US, Japan, Britain and Germany to buy breathing time. Predictably, they drew a blank.

As he once remarked, when you go with a begging bowl, the treatment is completely different. There were a number of sights that had to be swallowed – for instance, being made to wait outside offices, or appointments given after great reluctance. Even the traditional protocol of the Governor being received by his counterpart was given the go-by and only junior officials met him to read out tough conditions.

All the platitudes that countries mouth frequently about eternal friendships, respect for civilisations, partnership of democracies, etc, were just that – hot air. When it came to the crunch, everyone said, “Show me the money”.

India had to pledge 47 tonnes of gold to get emergency accommodation from the IMF and other central banks. This had to be sent to the Bank of England in London and the UBS in Zurich on their insistence, despite political and reputation risk. There was no other option after the IMF turned down a plea to hold the gold in India itself.

That pledge fetched India an emergency accommodation of about $1.7 billion from the IMF and another $1 billion from Germany, Japan and other countries. Soon after, a new government under Narasimha Rao took over and economic reforms were launched.

Challenges for Greece

Greece today is in that situation. Its fellow EU neighbours have agreed to another bailout package – which has come at a cost. As some argue, conditions are stiff and practically amount to a ‘transfer of sovereignty’. To get this funding through, Greece has to pledge €50 billion worth of assets to a new fund.

And just as our creditors in 1991 had demanded that the gold be sent to England, these creditors have demanded the fund be based in Luxembourg.

That condition may have been relaxed and the location retained in Athens as part of the latest agreement.

But mind you, all these conditions are only for the emergency lines of credit. The sacrifice that Greece has to make still lies ahead. That may include everything that India had to do – pledge resources, get bridge loans, extend maturity of short-term loans, sell off government assets, reform taxation, cut pensions, open up the economy for foreign investment, and recapitalise banks, among others.

What happens to a borrower, which has lived beyond its means and not repaid loans is evident – that’s part of our chequered history. There’s a lesson in all this – paying back is costly; not paying back is costlier.

Published on July 13, 2015

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