Has Greece asked Argentina?

As my readers would know I have been discussing Europe’s financial issues for quite some time. I have stated many times that Greece’s issues are far bigger than just internal fiscal policy, and that I consider Greece’s default an inevitability due to its macro-economic position within the European marketplace.

Overnight PIMCO added their voice to the “inevitable” argument.

The head of PIMCO, the world’s biggest bond fund, predicted that Greece and other European economies would default on their debts to resolve their problems as the euro area deals with its debt crisis.

Greece’s government won a vote of confidence late on Tuesday, a crucial step toward securing further short-term and longer-term financial aid from the European Union and the IMF as the country tries to avoid the euro zone’s first sovereign debt default.

“For the next three years, we’re going to see different economies work out different problems. For European economies, especially Greece, it would be through default,” Mohamed El-Erian, chief executive of PIMCO, told reporters in Taipei on Wednesday via a video conference.

He didn’t identify which economies other than Greece he was referring to.

El-Erian has suggested in the past that Greece would default and that Europe risks wasting money for nothing by pumping billions of dollars into the ailing economy.

Obviously it is possible that PIMCO has a “position” on Greece that has led to this announcement, but they are certainly not the only voice in the crowd. From the UK Gaurdian today.

Seen from Brussels, Berlin or Frankfurt, the crisis playing out in Athens this month looks almost simple, and linear in its direction. The Greek prime minister, George Papandreou, wins a confidence vote, as he did on Tuesday night. The government gets MPs to approve its package of austerity measures, set for a vote next week. Then comes the next slug of cash from the IMF and the eurozone, plus the agreement of another massive loan, worth tens of billions of euros. This isn’t easy, European policymakers admit: it requires adept political management, courage, and the ability to stay the course. But the alternatives don’t bear thinking about: the first-ever default by a sovereign member of the European single currency, the possible toppling of the Greek banking system and other institutions around the world in a repeat of the panic that followed the collapse of Lehman Brothers in 2008 – and an existential threat to the entire European project.

Right on the risks, but wrong on the policy prescription. After a month of mass demonstrations in Greece, and the near-dissolution of the government last week, this takes too little account of reality, either domestic and political or international and economic. Not only has Mr Papandreou to get parliamentary approval for €28bn of spending cuts, tax increases and privatisations, he must begin implementing this draconian programme by 3 July, in time for the next extraordinary meeting of eurozone ministers. Even in ordinary times this would be regarded as ambitious, but to do so amid the worst recession the country has seen in four decades would require a miracle of collective discipline. The new finance minister, Evangelos Venizelos, has already tried to change the plan to answer a key grievance of protesters, by dropping an increase in fuel tax and a property tax, and trying to increase Greece’s notoriously leaky tax take by targeting the self-employed.

….

Greece’s main opposition leader, Antonis Samaras, for one, is no longer buying it. His economic logic is impeccable: the imposed cuts are squeezing demand at a time when the economy is in deep recession. Indeed, it is already happening: 50,000 businesses went bankrupt last year and the economy is in its third straight year of recession. The fact that the main conservative opposition points this out, however, is a big new twist.

Economically, socially and now politically, the status quo is unsustainable. Instead of postponing the inevitable Greek default, it would be far smarter to prepare for it.

I completely agree. I have stated previously that the austerity measures enforced by the IMF and the EU are not working because they are killing off industrial output when increasing productive competitiveness is the only real solution available to Greece if it chooses to stays in the Euro. Quite simply under these conditions Greece will eventually default on debts, noting that IMF loans ARE more new debts. What the Greek parliament should be doing is determining the best strategy for Greece and its people.

What I find odd about this current situation is that the Greek parliament seems to be hellbent on following the path prescribed by the IMF even though it is very obvious it is having a detrimental effect on their fiscal position and economic well-being. As El-erian stated.

“Nothing has been done to enhance growth,” …. “No single (Greek) indicator has shown strength”

Yet the Greek government seems to be fighting for its life in the belief that the current plan will somehow lead to their economic salvation. I wonder if members of the Greek parliament have ever sought advice from the Argentines, given they were the most recent country to have a comparably sized default. If they did I suspect they would be receiving some fairly different advice about what strategy to take to enhance their economic future.

Argentina said on Saturday it was better off free from the shackles of the International Monetary Fund, which it blames for contributing to its $100 billion debt default nearly a decade ago.

In a statement to the IMF’s steering committee, Argentina said “we can proudly celebrate that we have cemented our economic independence as never before in our recent history.”

The South American country has a fraught relationship with the IMF, stemming from what it sees as the Fund’s mismanagement of its 2001-2002 debt crisis.

Argentina is now trying to restructure more than $6 billion in defaulted debt with creditor nations, and the IMF said on Thursday it hoped to schedule a long-delayed economic review.

Argentina said it had learned “harsh lessons” from its earlier crisis and its economy was faring better because it was not obliged to follow IMF guidance.

The IMF conducts general Article IV reviews with all of its 186 member countries as part of its monitoring of the global economy, but loan programmes come with strict conditions attached.

“If we had followed the recommendations traditionally made by (the IMF) — which have favored opening our economies, foreign indebtedness, financial liberalization and ‘unbeatable’ market-oriented reforms — the outcome would have been totally different and today we would have been embroiled in a fresh economic, social and political crisis,” the statement said.

I hope for the sake of the Greek populace someone in the Greek parliament is doing some homework on recent economic history and sought advice from independent council on developing an economic strategy for Greece’s future.

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Comments

  1. DE, I enjoy your analysis of the European debt crisis, and agree that a default is inevitable. However, there are some challenges with the implementation.

    I get the feeling their best option is to default but keep the euro. I have no idea whether this is possible under the EU rules, but there are problems with introducing a new currency, the main one being that any Greeks with money will keep their existing euros in foreign bank accounts.

    I’m sure there is a way out, but there are many, many vested interests, even in Greece, who need to agree before serious action is taken.

    BTW grammar correction – sought advice from Argentina.

  2. It appears as though the IMF is just trying to pressure the Greeks into having a fire-sale of national assets, just as they have done to other countries in the region and around the globe.

    The best option for the Greeks is to tell the IMF to shove it and default. As you say, austerity wont solve the problem, and it is also too big to solve by selling off assets. Default in some form is inevitable.

    Has the IMF actually ever helped any nation get out of debt problems and properly restructure an economy? I cant think of any off the top of my head.

  3. How and why the IMF is trying to go against the historical record doesn’t make sense.

    The best option – although it will involve a lot of pain, and not just for Greeks – is default, and getting out of the Euro.

    Only the Germanic, and other Northern European states should have been in the Euro in the first place.

    If they are to survive, they need to get rid of the peripheral states that culturally and economically can not compete.

    This will upset the bureaucrats and the bankers, but will be more robust for Europeans over time.

  4. Alex Heyworth

    This article http://mises.org/daily/5331/The-EMU-as-a-SelfDestroying-System analyzes the EMU as essentially being a tragedy of the commons. There is always an incentive for governments to compete to borrow the most money in the knowledge that the adverse effects (including, but not limited to) picking up the pieces in the event of a debt crisis or default, will be spread over the whole EMU membership.

    In the case of Greece, this problem was far worse for a number of reasons, including its history of default and the high exchange rate used to convert drachma to euro when Greece joined the EMU. This made a good deal of its economy uncompetitive, which increased unemployment, which the government responded to by lowering the retirement age to an unsustainable level, borrowing the money to pay for it.

  5. I don’t for a minute believe that Greek policy makers are actually under any impression that savage austerity will eventually solve their problems.

    Quite simply, they are TERRIFIED of the political repercussions of defaulting – an act which would render the French and German banks insolvent, force the governments of those countries to bail the banks out, spark a domino effect among the other PIIGS and very possibly spark a second GFC-type event (especially given the fragility of the current so-called recovery) – all of which Greece would ultimately be blamed for.
    They would rather flagellate the people whose welfare they were elected to protect. But for how much longer they can do it is a good question.

    • I agree.

      Nations with large debts (and not only Greece, but others in Europe as well) have been surviving for the last 20 years or so, knowing to be in a non-sustainable position and have learned how to kick the can down the road daily, government after government.

      A sudden default now would be very atypical IMO.

      The common instinct will be to look for possible further compromises and the IMF/EU loan is just that.

      If then default will be, I expect it to be very prolonged, over many years, hidden as much as possible in numbers and methodology. Not a “sudden” event.

      • Greece tends to be in default about half the time historically. i would think a sudden default is far from atypical, its just a larger sum of money this time (in euros rather than Drachmas).

    • I also think the IMF has misplayed its hand – not for the first time.

      The IMF has basically said to the Greeks, do as the ECB directs, or you will get no help from us.

      This leaves the Greek Government in a completely invidious position. They are totally dependent on external help, without which there will be widespread ruin in Greece.

      But the helper-of-last resort, the IMF, is not acting the in the better interests of the Greeks and its other member states. It is acting to support the prescriptions of the ECB.

      I think the IMF has probably abandoned its charter – or at the very least it has compromised its independence. It has subordinated its mission to the personalities, institutions and politics of the EU.

      No wonder the Greek Government is desperate!

  6. The causes of the Greek crisis get down to two things:

    Greek membership of the EMS;
    The entirely disingenuous approach to debt taken by the borrowers (the Greeks), the lenders (the banks); their advisers (Goldman Sachs and the ratings agencies); and the regulators (the ECB and the European commission).

    All parties need to take responsibility for the errors they have made in the period leading up to the adoption of the Euro and in the management of fiscal and monetary affairs ever since. In practice, the creditor nations, their banks and the ECB are all going to have to wear their losses. The sooner they accept this and get on with it, the better off they will be. The Greeks will live with this for decades to come. That is inescapable.

    As for monetary union, the Greeks should leave. They are now labouring under the 21st century equivalent of a Gold Standard. The output of the Greek economy is convertible/negotiable at a rate which is just too high to be sustainable.

    In the good old days, orthodox bankers and finance ministers used to insist that everything produced or consumed within a national economy be convertible to gold at a fixed rate. Exchange rate inflexibility frequently lead to prolonged, intense contraction in less-competitive economies, with all the attendant afflictions – unemployment, poverty, social and political unrest and precarious government.

    The Euro is a synthetic gold standard from the viewpoint of the so-called peripheral economies. Across the Euro-zone, all output is convertible at prices determined by the competitive advantages and successes of the dominant economy – Germany.

    In seriously indebted countries, this is now leading to the vicious spiral of debt-deflation, widespread insolvency and economic collapse. This can only result in mass unemployment and prolonged, unnecessary trauma.

    The EU and its member states have to very quickly create a mechanism for individual states to leave the EMS….allowing for depreciation to occur….relative price adjustments to be made….competitiveness to be re-established…. output to recover….fiscal balance to be restored…..and by a process of dynamic adaptation, achieve recovery and, eventually, renewed prosperity.

    It is implicit that the Greeks will default if the leave the EU. But this is unavoidable in any case. As Martin Wolf has pointed out, it is wise to prepare for the inevitable.

    The elite in Brussels and Berlin should very quickly give up their belief in monetary magic and accept that they have got it all wrong before too much more harm is done to the welfare of millions of Europeans citizens, who, after all, are not the authors of these troubles.

    • Alex Heyworth

      “The elite in Brussels and Berlin should very quickly give up their belief in monetary magic and accept that they have got it all wrong”

      The problem is that most of them do not accept that they got it all wrong. They are blinded by the grand vision of political union.

      • They have attempted to finesse their way from customs union to monetary union and thence to fiscal and political union.

        But this will not work.

        There is nothing more likely to induce disunity between Europeans than a sense that one state is exercising dominance over others.

        The raison d’etre of the EU may well have been quite limited at the outset, but it has been accepted and expanded because it has delivered economic benefits for all Europeans. If membership of the EU is now going to mean the deprivation of some of its citizens for the financial benefit of others, then the union will not last long at all.

  7. I lived in South America from 2007 to 2009, we used to fly to Buenos Aires to do our shopping once every few months, simply because it was so cheap.
    Greece could become the shopping capital of Europe !

  8. The people of Greece will not stand for further austerity.

    Greece has a history of military takeover and the Papandreou government is on the precipice.

    I posted this link below in an earlier thread.

    http://www.youtube.com/watch?v=qKpxPo-lInk

    It’s a 75 minute Youtube clip in Greek with English subtitles called Debtocracy and explains how the Greek government hoodwinked its own people through boondoggles and fraudulent currency swaps involving Goldman Sachs and JP Morgan

    The film convincingly argues that the Greek debt is a neo-liberal (“Economic Hitman”) scam and there are strong precedents for repudiating it.

    And when Greece defaults, the following link contains some preparation advice gained from Argentina’s collapse:

    http://www.chrismartenson.com/blog/preparing-economic-collapse/57744

    I guess the problem here is the high likelihood for it to become globally systemic.

  9. The logistic of defaulting and introducing a new currency will be staggering. The Greece government must confiscate all Euro holding in Greek banks and business to prevent massive capital flight, and then impose capital control with a fixed exchange rate. The distribution of the physical currency will also be a nightmare. Further more, since nobody will lend the Greek government any more money, the only way to finance Government spending and payroll is to PRINT it. Instead of Argentina, it’ll end up more like Zimbabwe.

    A country that collects 40% of GDP while spending 50% of GDP is not sustainable.

  10. I think everyone agrees that an austerity program is not going to help Greece. But what are the alternatives?

    Computers have a “safe mode” that you can run when all else fails.

    That concept gave me the idea that economies should have a “safe mode”; that is, a plan ready in their bottom draw when everything fails.
    A while ago I wrote a blog on a “safe mode”.
    http://www.buoyanteconomies.com/Safe%20Mode%20for%20the%20Economy.htm

    Greece needs a bit more on the fiscal side. However, it must leave the Euro, devalue to stimulate its economy and provide employment, and restrain the growth of bank credit to avoid going into further debt.

    I agree Greece has much to learn from Argentina.

  11. With all this drama surrounding the crisis with Greece and their inevitable default, why is it that the AUD – EUR exchange is actually trending back down.

    Forgive my ignorance on the subject, but I thought we would be pushing 80c + to the EUR rather than heading backwards with the news they have been having.

  12. > The logistic of defaulting and
    > introducing a new currency will be
    > staggering. The Greece government must
    > confiscate all Euro holding in Greek
    > banks and business to prevent massive
    > capital flight,
    > and then impose capital
    > control with a fixed exchange rate.

    Imposing fixed exchange rate would defeat the purpose of reintroducing their own national currency.

    With a floating exchange rate it would be possible to freeze all Euro holdings and allow exchanging them at any present and future time for the new currency according to market based rates. In case of business they could allow foreign settlements in Euro and limited use for travel.

    • Greece effectively has a fixed exchange rate with countries that use the Euro. Also, the Euro may change value in response to factors that are not relevant to the Greek economy. The Euro is possibly the worst currency option for Greece.

      It is not necessary for Greece to fix its exchange rate to have its own currency. Nor is it necessary to impost capital restrictions.

      Greece could retain all Euro based bank accounts in Euros and introduce a new drachma, initially running with two currencies. However, it may be easiest to initially tie the drachma to the Euro.

      For example, initially they could say that two Greek Drachmas were worth one Euro and all wages and salaries, prices etc in Euros would be converted to Drachma. Euro based debts and deposits would be free to be converted to the new currency, at the rate of 2 for one.
      Immediately, Greece would halve the cost of Greek inputs in its products. That would create employment, generating demand for Greek products, both in Greece and from other countries.

      The new drachma would be just as market driven as the old Euro.
      Later, Greece could adopt a more flexible exchange rate system

      Greece would be able to repay its debts, not by austerity but by employment and prosperity.