Greek default? It's already happening, debt deal or not.

Greek debt swap may not be a default technically speaking, but it's still a default. Holders of Greek debt and Greece's citizens are feeling its pinch.

John Kolesidis/Reuters
Greek police officers shout slogans as they protest against their pension fund's participation in the Greek bond swap in Athens March 7, 2012. The deal may help Greece avoid a technical default, but it's defaulting in all but name.

Sovereign default, as a rule, is nasty business. It ripples throughout the world's financial system, rattling investors and sparking huge sell-offs.

That is why the investing world is so focused on Greece, which is teetering on the edge of default. On Tuesday, markets tanked on worries that enough holders of Greek debt might not agree to the restructuring deal that had been negotiated. The deadline is Wednesday. Some analysts warn that such a default would trigger another financial crisis on the order of the 2008 meltdown after the failure of Lehman Brothers, perhaps worse.

By Wednesday, news out of Greece was a little more reassuring. At least two-thirds of Greece's debt-holders are likely to accept the restructuring, which would trigger collective-action clauses that would force all the bond-holders to accept the deal. If 90 percent of the bond-holders take the deal, then it wouldn't trigger a default, technically speaking.

But make no mistake: Greece is defaulting, even if it's dubbed "voluntary.' The banks and other holders of its debt will get back only a fraction of what they invested. This is how nations work off their excess debt: Everyone from taxpayers to bond-holders takes a hit. It's a process that Portugal, Japan, and other nations will have to go through to bring their debt back down to a manageable level.

Greece is an example for other nations of what it's like to go through the economic wringer of default. It isn't pretty.

In February, Samantha Parisi was fired from her job at Thalatta Shipping, a respected maritime company in Thessaloníki, because of a downturn in business. It's a common refrain throughout Greece. In her family, "we are three people and only my brother is working 'under the table' in a cafeteria. My mother is unemployed for two years now and has no chance whatsoever finding a job," says Ms. Parisi, a graduate of The Citadel in Charleston, S.C., in an e-mail. "I am seriously thinking about going to Germany."

Already in its fifth year of recession, Greece's economy has shrunk 16 percent (a contraction three times larger than the United States endured doing its recent Great Recession.) And the Greek downturn shows no sign of abating: nearly half of it happened last year. Default "will intensify that recession and lower economic activity," says Richard Phillips, senior analyst at S-Network Global Indexes, a publisher of financial indexes based in New York.

"You wake up in the morning and there is another store closed," says Lambros Semertzidis, an accountant also from Thessaloníki, in an e-mail. "All the companies are laying off people. Nobody pays anymore.… We do have clients and work, but nobody pays on time."

The economic contraction means the current Greek aid package might not be enough. Under the deal, private-sector bondholders agree to write down nearly 70 percent of its debt, the European Union and the International Monetary Fund kick in €130 billion ($170 billion) to keep the government afloat, and Greece agrees to a raft of tough reforms to bring its debt ratio down from a whopping 160 percent of gross domestic product to 120 percent by 2020. But if the economy keeps shrinking, tax revenues will be lower than the aid package envisions.

And the reforms are harsh, enough so that Greeks rioted in the streets and wrecked nearly 100 buildings when the Greek Parliament agreed to the measures. They include making $4.3 billion in extra budget cuts this year, selling off more than $60 billion in government assets, cutting the government workforce by 15,000, and boosting public transport fares by 25 percent. The withdrawal of government funds through budget cuts puts many Greeks in a double bind: Prices rise while business declines.

"Although our business is down 50 percent, gas prices have risen by 50 percent," writes Kostas Marinos, a truck driver who lives in a small village, in an e-mail. "I am not married and I live with my parents. My father only gets a small pension. If I do not bring money to the house they would be in deep trouble."

The other option for Greece is to default on its own terms, leaving the eurozone and creating its own currency. That's no panacea. When Argentina defaulted on all its debts in 2001, Argentines saw their bank deposits frozen, stocks crash, the value of their currency fall by two-thirds against the US dollar, inflation, and the economy shrink by at least 20 percent.

Struggling Portugal, Italy, and Spain, are hoping Greece will stick with the current engineered default, because if not, they could be next to go through the default wringer.

The Greeks "are just walking along the edge of the volcano," says Andrew Rose, an economics professor at the University of California, Berkeley. "The millisecond that Greece defaults, there'll be an attack on Portugal."

In Greece, "they either have to raise their productivity by a huge amount or lower their wages tremendously," Mr. Rose says. At some point, wages will fall to such a point that Greece will become a low-cost producer of goods and services and its economy will begin to grow again.

How far those wages fall depends not only on Greece but on the health of the European economy. If the eurozone can grow robustly, it will provide a ripple of economic activity that would buoy Greece's economy and ease the adjustment somewhat, says Joshua Aizenman, economics professor at the University of California, Santa Cruz. But if the region's growth rate is very low – it contracted slightly in the fourth quarter – then Greece faces an even more crushing adjustment.

"Even foreign immigrants are leaving Greece and going back to their countries," says Mr. Marinos, the truck driver. "There are no jobs here."

– Michail Vafeiadis contributed to this report.

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