Greece vs. Argentina

Sorry for the late post, guys. I got back from a five-day Model UN conference late last night and my post for this morning looked just about the same as Jeff's. I would add the below graph, which illustrates my/Jeff's point that Italian and Spanish debt grew in the private sector over the course of 2000-2010. Government debt during the last decade held about constant for both nations. So the problem was not the government issuing more debt than its country could produce in GDP - it was simply individuals consuming beyond their means (or so the data suggests).

 

Not so in Greece. As of February 10, 2012, Greek public debt as % of GDP was 166%. Even before the debts tied to IMF bailouts, Greek debt approximately equaled GDP as early as 2005. The government truly did borrow huge sums despite the tax collection issues that Lewis implies are as Greek as big fat weddings.

But since Jeff already talked about different debt patterns, I re-blogged tonight about what we talked about in class today: Greece vs. Argentina. Krugman detailed the Argentina bailout, Lewis the Greek bailout. Some data:

What the data shows is that both Greece and Argentina faced massive recessions, but that Greece's ouput data appears much rosier (relatively speaking of course). GDP decline in Greece in 2012 was only half of Argentina's. Slowing in industrial production was almost 50% worse in Argentina than in Greece, as was the contraction in retail sales.

Where Greece clearly suffers is in capital markets. The public debt statistic sticks out like a sore thumb that is indebted to an even sorer thumb.

Inevitable, right? Just part of the leverage trend of the 2000s, right? As the debt crisis argument goes, someone had to suffer for us to recognize our dire international financial straits, right?

But maybe it did not have to be so. The IMF published in 2003 what it titled "Lessons of the Crisis in Argentina." In a report that Timothy Geithner (former US Secretary of the Treasury) himself approved, the IMF noted about Argentina: "When the economy slid into recession, the Fund faced a somewhat different and more serious dilemma. In hindsight, the most viable option would appear to have been an early debt restructuring involving a significant present value reduction, combined with the abandonment of the currency board."

Now we have moved onto Ben's blog post. Of course, the Greek exit is scary. The short-run consequences include possible recession and widespread profit loss due to the default. In other words, the fears Ben cites are the very "present value reductions" that the IMF say clouded the judgements of policymakers regarding Argentina. Yet here we are in Greece in 2012 possibly making an identical mistake.

The reason for the poor policy, the report continued to say, was that "the authorities were unwilling even to consider the possibility of an exit: neither the government nor the public were prepared to take such a drastic course until it was forced upon them."

And right on point, Greek Prime Minister Antonis Samaras pronounced last week, "We must save the country from catastrophe. If we fail to stay in the Euro, nothing will make sense."

Sources:
http://www.marketwatch.com/story/greek-prime-minister-warns-of-euro-exit-2012-11-04
http://www.bbc.co.uk/news/business-16290598
http://blogs.reuters.com/scott-barber/2012/02/10/breaking-point-greece-vs-argentina/