Photographer: Kostas Tsironis

Here's What Defaults Did to Other Countries as Greece Teeters

History offers hints for Greece's future

By Friday, we may know whether Greece has reached a debt deal with its creditors. A failure could trigger a default and raise the prospect that it becomes the first country to leave the euro currency union.

The history of previous economic cataclysms suggests that changes in currency values can work as escape valves that quickly, though not painlessly, relieve pressure on an economy. Massive depreciations allow countries to become more competitive internationally, enabling them to draw back from the brink more quickly.

The charts below compare changes in exchange rates before and after four other disruptions that riled markets: Russia's default in 1998, Argentina's in 2001, the U.S. during and after the collapse of Lehman Brothers Holdings Inc. in 2008, and Greece's debt restructuring in 2012. For Russia and Argentina, defaults punished their currencies. 

For the U.S. dollar, the result was more mixed. Greece is part of the euro zone, and the 2012 impact on that currency was also mixed.

The next charts show what happened to gross domestic product. Turns out the Argentine and Russian defaults were boons in those countries, with growth rebounding sharply. Upturns came much more slowly in the U.S. — which while home to the biggest-ever corporate bankruptcy didn't default on its sovereign debt — and in Greece.

Unemployment rates in Argentina and Russia also showed clear inflection points for the better, while workers in the U.S. and Greece had to suffer through delayed improvement. 

What separates Greece's fate from Argentina and Russia is the Greeks' membership in the currency union (whereas Argentina and Russia have their own exchange rates). That means the country can't enjoy the benefits of a massively cheaper currency before exiting the euro first, something that officials across the region have ruled out.

"The problem with Greece is that defaulting on the debt without the followup of a devaluation may buy time but won't resolve its growth problems," said George Magnus, senior economic adviser to UBS Group AG in London. "If Greece chose to default and stayed inside the euro zone, the option of a devaluation would not exist so it's not clear why Greece should experience a growth rebound."

"This dance that's happening at the moment could go on for quite some time," he said.

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