Restoring Greece — Argentina redux?

Nouriel Roubini in the Financial Times called upon Greece to default and abandon the euro “to quickly restore competitiveness and growth, as it did in Argentina.”

To be sure, it’s easy to see the Argentina analogy work not only for Greece but for any Eurozone member country. Each of them has a banking system pegged to a de facto foreign currency, and each of their national central banks lacks the capacity to act as a full lender-of-last-resort. But the analogy does not extend much further.

At present, the Greek predicament is much worse than that of 2001’s Argentina. Greece’s public debt-to-GDP, public sector expenditures-to-GDP, and public sector deficit-to-GDP ratios are each at least double those of Argentina; Greece’s domestic private sector debt-to-GDP being more than four times as high as in Argentina, according to the World Bank.

Perhaps the optimist in Mr Roubini was referring to Greece mimicking Argentina’s ‘growth miracle’ following its debt demise then? Unfortunately, the last decade’s global (agricultural) commodity bull market was the most important factor in the South-American country’s return to relative normalcy. The windfall gains allowed Argentina in 2006 to cut itself loose from its “privileged creditor”, the International Monetary Fund, making the IMF probably the only creditor that was paid in full.

Now where does this leave Greece? Other than hoping for mandatory planting of olive trees to boost competitiveness and growth overnight, any realist must try and come up with a sustainable plan for a less rosy global economic outcome over the next couple of years. Realising that Greece isn’t Argentina is a key starter.

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