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Monday, June 13, 2011

What can Greece learn from Chile and Argentina?

A Lesson for Greece from the South

By the south I mean south America.  Northern European countries could use a little economic history from two not so distant currency, debt and financial crises in LATAM. In 1982 Chile abandoned an unsustainable peg of the dollar. The USD went from 39 pesos to 46 over night. Many Chilean firms and Small Enterprises (including my father’s) had borrowed in USD. You can imagine the composite effect. As the country came to a halt and unemployment reached 30%, the debt burden of firms rose sharply simply by currency exchange. The banking system (which was also indebted in USD but receiving pesos from its customers) soon collapsed. Instead of fiddling around with temporary measures, Chilean authorities bought all the bad debt from banks. Chile did not default. Yes, the government assumed the debt of private banks and gave them a clean balance sheet and repayment terms that banks could afford.  A few months into the devaluation, out of 41 banks, 16 were bankrupt, and 6 were intervened.   Private banks now had a debt with the government. Large privatizations followed to pay for this debt. The impact on the economy was very, very strong. In 1981, Chile’s GDP was 32 billion USD, in 1985 a mere 16 USD Billion, it was not until 1990, almost 8 years later that Chile’s GDP returned to the pre-crisis levels. Chile’s GDP in 2000 was USD75 billion and USD170 in 2010. Perhaps the most dramatic illustration is the following chart. Before the Crisis in 1982 the government debt was about 30$ of the total debt, by 1988 it was 70% and by 2010, it was 6.1%.

Chilean Foreign Debt by year, Banco Central de Chile

Argentina in 2001 also had to end a currency board arrangement and impose severe limitations to capital outflows.  The economy had been faltering and debt mounting since 1999, invertors demanded ever greater returns from Argentine bonds to compensate them for their risks. Pressures from the IMF (much like the ones are being made on Portugal and Greece) pointed to austere policies like those applied in Chile. Nestor Kirchner decided he would not submit his countrymen to such a treatment. The barber of Buenos Aires decided to default and repudiate the debt. In 2001 Argentina’s GDP was around USD270 Billion, (almost 4 times that of Chile). By 2002, after the haircut, it had fallen to USD102 Billion. (Yes these figures are correct). In 2007 Argentina had recuperated its pre-crisis GDP.

In the end Chile and Argentina seemed to have solved their problems.


1) No easy way out. There will be a lot of suffering, for a long time, expect 50% - 70% decrease in GDP. Expect very high unemployment and very high poverty levels. Default is no cheaper that the bad tasting medicine.

2) It will pass, so plan for the Greece of 2030.

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