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Greece: the next Argentina?
In a Bloomberg article today, a fund manager is quoted, comparing Greece's current dilemma to that of Argentina a decade ago:
April 7 (Bloomberg) -- Greece may default on its debt as early as this year without “extraordinary” financial assistance from the European Union and International Monetary Fund, said Stephen Jen at BlueGold Capital Management LLP.
The challenges facing Greece are similar to those that confronted Argentina, which defaulted on $95 billion of debt in 2001, as the government enacts austerity measures to narrow the European Union’s biggest budget deficit, Jen, managing director at the hedge fund, said today in an interview in London. That may drive the Mediterranean nation into a recession, he said.
“A default may be ultimately unavoidable,” Jen said. “That eventuality may only be postponed by aid many times bigger than the 25 billion euros ($33 billion) people have in mind.” Any assistance needs to “impress the market,” he said.
http://www.bloomberg.com/apps/news?pid=2...
Jen's analogy potentially is a good one. During the 1990s, Argentina linked its peso to the U.S. dollar, at a one-to-one exchange rate which the government promised was fixed forever. Like Greece in the pre-euro days, Argentina had been a chronic devaluer, compensating for domestic iinflation by weakening its currency in order to retain a semblance of international competitiveness.
Suddenly changing its character to a 'hard currency' country brought several changes to Argentina. For one thing, foreign capital poured in, impressed by the 'one-to-one' guarantee. International credit was readily available. However, in a nation where consumers traditionally had resigned themselves to inferior-quality domestic goods -- since the old, unlinked peso had little external buying power -- the new dollar-linked currency produced a surge of imports, financed by international, dollar-denominated debt.
Meanwhile, the domestic economy stagnated: it was only globally competitive in agricultural exports, such as meat and grains. The manufacturing sector wasn't even on a par with the neighboring regional giant, Brazil. With the added handicap of a strong currency, it continued to contract.
As a result of its overvalued currency, the booming Nineties were largely a lost decade in Argentina. Debt-fueled consumption maintained the illusion of economic health, but there was little indigenous growth. When the Argentine economy slid into recession at the end of the 1990s, the authorities found themselves in a hopeless vice. They could not slash interest rates or devalue the currency to boost the economy, because it was tied to the U.S. dollar. But the debt load quickly became crushing if the economy couldn't grow its way out of it. When lenders caught on to Argentina's debt trap and shut off the taps, the economy wilted and the weakest links had to give: the debt servicing and the dollar peg both went by the wayside, in an epic default which ended up slashing the peso's value by two-thirds.
Like Argentina then, Greece now is trapped within a hard currency regime which suits the needs of a globally competitive exporter, Germany. In most respects, the small Greek economy is not internationally competitive. But having a strong currency has encouraged taking on debt to buy imports. Now the debt load has become crushing; lenders are demanding penalty rates; and austerity measures are cooling the Greek economy.
The EU, in concert with IMF, has the financial capacity to bail out Greece if it so chooses. But when excessive debt is the problem, piling on more debt is no long-term solution.
If a bailout doesn't happen, or fails, then in Greece as in Argentina, the weakest links must give: the debt servicing and the currency peg. Once more in the azure-walled ouzo parlours, they'll be serving drams for drachmas. Oupa!
In a Bloomberg article today, a fund manager is quoted, comparing Greece's current dilemma to that of Argentina a decade ago:
April 7 (Bloomberg) -- Greece may default on its debt as early as this year without “extraordinary” financial assistance from the European Union and International Monetary Fund, said Stephen Jen at BlueGold Capital Management LLP.
The challenges facing Greece are similar to those that confronted Argentina, which defaulted on $95 billion of debt in 2001, as the government enacts austerity measures to narrow the European Union’s biggest budget deficit, Jen, managing director at the hedge fund, said today in an interview in London. That may drive the Mediterranean nation into a recession, he said.
“A default may be ultimately unavoidable,” Jen said. “That eventuality may only be postponed by aid many times bigger than the 25 billion euros ($33 billion) people have in mind.” Any assistance needs to “impress the market,” he said.
http://www.bloomberg.com/apps/news?pid=2...
Jen's analogy potentially is a good one. During the 1990s, Argentina linked its peso to the U.S. dollar, at a one-to-one exchange rate which the government promised was fixed forever. Like Greece in the pre-euro days, Argentina had been a chronic devaluer, compensating for domestic iinflation by weakening its currency in order to retain a semblance of international competitiveness.
Suddenly changing its character to a 'hard currency' country brought several changes to Argentina. For one thing, foreign capital poured in, impressed by the 'one-to-one' guarantee. International credit was readily available. However, in a nation where consumers traditionally had resigned themselves to inferior-quality domestic goods -- since the old, unlinked peso had little external buying power -- the new dollar-linked currency produced a surge of imports, financed by international, dollar-denominated debt.
Meanwhile, the domestic economy stagnated: it was only globally competitive in agricultural exports, such as meat and grains. The manufacturing sector wasn't even on a par with the neighboring regional giant, Brazil. With the added handicap of a strong currency, it continued to contract.
As a result of its overvalued currency, the booming Nineties were largely a lost decade in Argentina. Debt-fueled consumption maintained the illusion of economic health, but there was little indigenous growth. When the Argentine economy slid into recession at the end of the 1990s, the authorities found themselves in a hopeless vice. They could not slash interest rates or devalue the currency to boost the economy, because it was tied to the U.S. dollar. But the debt load quickly became crushing if the economy couldn't grow its way out of it. When lenders caught on to Argentina's debt trap and shut off the taps, the economy wilted and the weakest links had to give: the debt servicing and the dollar peg both went by the wayside, in an epic default which ended up slashing the peso's value by two-thirds.
Like Argentina then, Greece now is trapped within a hard currency regime which suits the needs of a globally competitive exporter, Germany. In most respects, the small Greek economy is not internationally competitive. But having a strong currency has encouraged taking on debt to buy imports. Now the debt load has become crushing; lenders are demanding penalty rates; and austerity measures are cooling the Greek economy.
The EU, in concert with IMF, has the financial capacity to bail out Greece if it so chooses. But when excessive debt is the problem, piling on more debt is no long-term solution.
If a bailout doesn't happen, or fails, then in Greece as in Argentina, the weakest links must give: the debt servicing and the currency peg. Once more in the azure-walled ouzo parlours, they'll be serving drams for drachmas. Oupa!
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