Chart of the Day: Don’t cry for me Greece

Today’s chart comes from Naked Capitalism, discussing a paper regarding the remarkable recovery of Argentina post its default in December 2001.

Following the default, which included removing a currency peg against the USD and subsequent devaluation, there was a severe financial crisis, with huge contraction in GDP – 11% for the year.

However real GDP – adjusted for the structurally high inflation (double digit) in the South American economy – returned to pre-crisis level after 3 years and returned to trend growth thereafter, as the chart above shows, with 8% real growth forecast for next year.

The drivers of the growth:

that the role of exports is not very large during the expansion of 2002-2008. It peaks at 1.8 percentage points of GDP in 2005 and 2010, and amounts to a cumulative 7.6 percentage points, or about 12 percent of the growth during the expansion. The story for net exports is even worse, with net exports (exports minus imports) showing a negative cumulative contribution over the period. The recovery is driven by consumption and investment (fixed capital formation), which account for 45.4 and 26.4 percentage points of growth, respectively.

Lot easier to grow your economy when you don’t have a millstone of debt around your neck isn’t it? Don’t cry just yet Greece (and Ireland, Italy etc)..


  1. Additionally I’ve seen tables of the 10 or so most recent defaults and they all seemed to follow this sort of growth pattern post default.

    Bill Mitchell reported a IMF study (or was it BIS?) earlier this year that showed defaulting nations do very well post default. A big loser from defaults, according to the study, was the politicians.

    It seems the scare tactics re: default come from those with the most to lose, bankers and politicians.

  2. Okay, so I get that default makes sense for the indebted sovereign.

    And NOT defaulting doesn’t seem to benefit the creditors either (not in real terms).

    From the FT Alpaville link posted earlier ( the European Commission thinks that even if the private Greek bondholders cop a 50% default Greece is still wearing debt to the tune 120% of GDP by 2020.

    So that’s 10 years of austerity followed by… 10 more years of austerity. Greek society doesn’t seem rock solid right now. How will Europe benefit from an impoverished and destabilised nation?

    What’s the point of dragging this out then? I mean, a couple more years of decay and the current Greek politicians will surely be hanging upside down from the Acropolis, followed by a default anyway.

    It’s like kicking the can has become a global sporting obsession.

    • One of those guys would need a chain to take his weight.

      Argentinians had a lot of street crime after their default. Not a nice place to be. However I think Iceland is doing OK.

      I read that historically Greeks never repay their debts.

      • I just had to look up whether your last sentence was serious or tongue in cheek. Turns out you were deadly serious!


        The first recorded default in Greek history occurred in the fourth century B.C., when 13 Greek city states borrowed funds from the Temple of Delos. Most of the borrowers never made good on the loans and the temple took an 80% loss on its principal.

        Greece has defaulted on its external sovereign debt obligations at least five previous times in the modern era (1826, 1843, 1860, 1894 and 1932). The first episode occurred in the early days of that country’s war of independence, and the last default was during the Great Depression in the early 1930s. The combined length of period under which Greece was in default during the modern era totaled 90 years, or approximately 50% of the total period that the country has been independent.

        Since this appears under a post from The Prince I feel compelled to remind readers that past performance is not a guarantee of future returns.

  3. Since this appears under a post from The Prince I feel compelled to remind readers that past performance is not a guarantee of future returns.

    Even though its used by the financial industry to make prophecies about expected returns, whilst economists ignore the past and expect all futures to be in equilibrium with the present….

    • Hahaha! I knew there was a longer, more complete version of that disclaimer.

      I was going to dare you to include that in your official communications, but then I remembered that you list it (quite bluntly) as one of Empire’s investment principles on the web site: Do not attempt to forecast or predict the economy.

    • Yep, better to deal with probabilities, which is how I structure my multi factor macro model for shares and how DFM models the AUD.

      Nobody knows the future – you can only deal with probabilities and tailor your investments to capture both the high probabilities and the surprises (both white and black swans)

  4. Given that the Argentinian govt lies about its inflation statistics, real ‘Real GDP’ is probably lower than stated. The latest CPI is 9.8%, but The Economist admits that “unofficial estimates are higher.”

    The WSJ recently reported that “The International Monetary Fund will use estimates from the private sector and provincial governments to measure economic growth and inflation in Argentina, underscoring the fund’s distrust of official data.”

    Although a decade has passed since default, some creditors are still battling the Argentinian govt for their money:

    • Yep. But even if *real* real GDP growth is half the official figures, that still means a return to pre-crisis GDP within 5 years.

      That’s still better than is being forecast for Greece in five years assuming ‘just’ a 50% default.

      It’s not like default is a ‘good’ option, but it seems like the least worst option.

  5. The Greek situation is terminal. They will have to repudiate the privately-held official debt and seek to re-construct the debt held by the ECB and IMF. Of course, repudiation will precipitate the failure of the entire Greek banking system. So they will have a bankrupt Government and no banks to speak of. Beyond that, they will have to leave the Euro zone if they are to have any hope of ever reviving economic activity.

    The IMF will ultimately have to rescue Greece and fund its reconstruction. But that is the point: the Greeks need reconstruction.

    This should have been done 2 years ago. Instead, the European leadership have elected to ignore reality and, as a result make things worse, for everyone, including their own taxpayers and the private banks.

    There must be a reasonable chance that Greece will eventually re-constitute its economy, but that can never occur while they remain in the Euro-zone and while they remain paralyzed by debt.

  6. Ronin8317MEMBER

    Argentina has its own currency, while Greece does not. I simply cannot imagine a scenario where Greece can exit the Euro without sparking a massive bank run, followed by hyperinflation. For better or worse, Greece no longer has any control over its destiny. It’ll have to contend with whatever actions Germany and France dictates.

  7. Ronin, this is the dilemma they face. The only thing that will work for Greece and the Euro-zone in general has been ruled out. They face an absurd choice between the impossible and the inconceivable. Yet they will have to choose reconstruction in the end.

  8. Karan, thanks for the post. Das is spot on in his critique of proposals to lever the EFSF, itself no more than a guarantee in the first place.

    This sheds light on the structural fragility of the whole Euro system. It is all based on limited, inadequate and possibly unenforceable guarantees made in relation to commonly-issued debts rather than on contributions of equity.

    The trouble is, now the promises may be called at a time when no-one can really afford to honour them. Clearly, new guarantees are pointless. They are worth no more than those made already.

    There is only one way to stop this circus and that is to stop it; suspend it and at the same time revive the original national-currency structure, swap the ongoing economy onto national platforms, re-finance the banking system, re-structure the complex of Euro assets/liabilities and devise a managed work-out.

    There will be convulsions. But these are unavoidable in any case.