IMF chief Lagarde_311.
(photo credit: Reuters)
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The common wisdom being bandied about by analysts is that Greece needs a bailout
and must remain part of the euro zone or else a global financial Armageddon will
ensue. According to the Sydney Morning Herald, International Monetary Fund
Managing Director Christine Lagarde said during a speech in Germany, “We need a
larger firewall,” warning that otherwise the world could slide into a “1930s
moment” of isolationism, which led to the Great Depression.”
I guess the
question is whether this is actually true. After all, the IMF has a tradition of
messing up these situations. Just look at the Asian financial crisis of 20 years
ago, or the Latin American crisis of a decade ago. The IMF prescription in these
crises exacerbated and prolonged the problems for more time than was
needed.
The IMF and the European Union are pushing for a bailout of
Greece in exchange for austerity measures. The problem is that the bailout money
they are talking about is barely enough to keep the country solvent for a month
or two. It sure seems like a black hole. Keep pumping more and more money into
Greece in order to delay the inevitable. Is this sound policy? Is this the
solution to prevent a “1930s moment”?
Don’t cry for me Argentina A decade ago,
another country was in similar dire straits as Greece is today. No, I am not
talking about Israel, which was certainly teetering on the brink, but rather
Argentina. There are many similarities between Greece and Argentina, and maybe
we can learn from the Argentinean model and apply it to Greece.
Mario I.
Blejer, a former governor of Argentina’s central bank, and Eduardo Levy-Yeyati,
one of its former chief economists, jointly penned an opinion piece for
Bloomberg about the Greek crisis, and they pointed to a lesson that can be
learned:
“The first has to do with the timing and size of the debt exchange. In
this regard, Argentina’s lessons are clear: Delaying the unavoidable and then
defaulting belatedly, unilaterally and in a disorderly fashion, imposes
significant costs in real activity, with no visible benefits. True, markets need
to see some pain to be convinced of a country’s willingness to pay, in order to
accept a default. But Argentina, like Greece now, went way beyond that. By the
time Argentina defaulted in 2001, it had experienced four years of recession and
its gross domestic product had declined by about 22 percent. How much pain
should Greece endure?”
Bob Adelman wrote in the
New American about the
similarity between then and now: “The Argentine crisis had been brewing for
years (some say as far back as 1913 when the welfare state began to be
installed) but came to a head when a new government was elected in December 1999
and found itself facing years of mismanagement and fraud left over from the
previous administration, including much higher debts and deficits than had been
claimed. In December of 2000, Argentina fell for the siren song of the IMF
(“we’re here to help you”) and received its first bailout.
“IMF aid made
the problem worse. The Argentine currency, the peso, was tied one-to-one to the
American dollar and had become grossly overvalued. With foreign trade declining
and interest payments to the IMF increasing, the government couldn’t continue
supporting the peso. An overnight devaluation of the currency took place,
dropping the peso’s purchasing power by 40 percent over one weekend and
beginning an inflationary spiral that reached an annual rate of 5,000 percent by
the summer of 2002.”
Just do it Instead of punting the problem down the
road another three or four months, why not just admit the truth: declare
bankruptcy and start fixing the problems like Argentina? By starting off with a
clean slate and a devalued currency, the Argentines where able to extricate
themselves from the mess, and from 2003-07 they averaged 9% growth. It wasn’t
easy for them, but in the end Argentina has a flourishing economy.
Greece
should declare bankruptcy and leave the euro so that it will be free to take the
steps it needs to get its economy back on solid footing. It should bring back
the drachma, let it devalue and then export its way out of the mess. Greece
can’t do that if it is tied to the euro and constrained by EU rules. No one says
this will be easy, but it will ultimately lead to living within its means and
having a solid economy.
Ansgar Belke, a professor at the German Institute
for Economic Research in Berlin, said: “What happened in Argentina proves that
it is possible for a country to come back after bankruptcy and once again play
an important role in international financial markets. I always supported a
restructure of debt in Greece. The damage would not be as grave as is commonly
feared. Greece is a relatively small country. A restructure would stagger a few
German and French banks... but this scenario is more sensible than the massive
credit that we’re currently giving.”
aaron@lighthousecapital.co.il
Aaron
Katsman is a licensed financial adviser in Israel and the United States who
helps people with US investment accounts.
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