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And, yes, I DO take it personally: Roubini calls for a Greek default, Argentina-style, and a return to the drachma
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Monday, September 19, 2011

Roubini calls for a Greek default, Argentina-style, and a return to the drachma

i have been a first-hand witness to developments in argentina following the 2001 economic collapse and have posted on it repeatedly here... i've never ceased to admire the guts it took for argentina to unilaterally kiss off the world bank, the imf, the global banks and the super-rich elites that they serve and go its own way... needless to say, the howls of outrage and disbelief from the holders of the world's capital were deafening... but argentina kept on keepin' on and has enjoyed growth rates averaging 9% a year since then, while at the same time accumulating a current accounts surplus that allowed them to totally pay off $10B worth of imf debt THREE YEARS EARLY - IN CASH...

the downside, unfortunately, is that the endemic corruption that is part and parcel of every level of argentine government survives untouched, the rich continue to get richer, the real inflation level hovers at 27% (despite the "official" government figures that peg it at less than 10%) and argentina is in the process of selling its heart and soul (farmland, oil, gas and minerals) to china...

nonetheless, i think roubini is 100% correct... greece should do what's right for greece and its citizens and refuse to be held hostage to those same super-rich elites and their bankster buddies just so they can stay in the eurozone...

roubini in the ft...

Greece is stuck in a vicious cycle of insolvency, low competitiveness and ever-deepening depression. Exacerbated by a draconian fiscal austerity, its public debt is heading towards 200 per cent of gross domestic product. To escape, Greece must now begin an orderly default, voluntarily exit the eurozone and return to the drachma.

The recent debt exchange deal Europe offered Greece was a rip-off, providing much less debt relief than the country needed. If you pick apart the figures, and take into account the large sweeteners the plan gave to creditors, the true debt relief is actually close to zero. The country’s best current option would be to reject this agreement and, under threat of default, renegotiate a better one.

Yet even if Greece were soon to be given real and significant relief on its public debt, it cannot return to growth unless competitiveness is rapidly restored. And without a return to growth, its debts will stay unsustainable. Problematically, however, all of the options that might restore competitiveness require real currency depreciation.

The first of these options, a sharp weakening of the euro, is unlikely while the US is economically weak and Germany über-competitive. A rapid reduction in unit labour costs, through structural reforms that increased productivity growth in excess of wages, is just as unlikely. Germany took 10 years to restore its competitiveness this way; Greece cannot wait in depression for a decade.

The third option is a rapid deflation in prices and wages, known as an “internal devaluation”. But this would lead to five years of ever-deepening depression, while making public debts more unsustainable.

Logically, therefore, if those three options are not possible, the only path left is to leave the eurozone. A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth, as it did in Argentina and many other emerging markets that abandoned their currency pegs.

Of course, this process will be traumatic. The most significant problem would be capital losses for core eurozone financial institutions. Overnight, the foreign euro liabilities of Greece’s government, banks and companies would surge. Yet these problems can be overcome. Argentina did so in 2001, when it “pesified” its dollar debts. America actually did something similar too, in 1933 when it depreciated the dollar by 69 per cent and repealed the gold clause. A similar unilateral “drachmatisation” of euro debts would be necessary and unavoidable.

Major eurozone banks and investors would also suffer large losses in this process, but they would be manageable too – if these institutions are properly and aggressively recapitalised. Avoiding a post-exit implosion of the Greek banking system, however, may unfortunately require the imposition of Argentine-style measures – such as bank holidays and capital controls – to prevent a disorderly fallout.

< wipes away crocodile tears thinking about bank losses >

also, thinking about greece and argentina reminded me that it was only one month and one year ago that i spent nearly two weeks with dear macedonian friends on the beach on the halkidiki peninsula in northern greece... i remember remarking at the time how similar the greek and the argentine mindsets seemed to me... both argentines and greeks, imho, are unequaled champions at living in the moment... when they're enjoying their free time, nothing else - and i mean NOTHING - else gets in the way... at any time of day, every greek family i saw had a large table either outside on the grass or on a terrace or balcony, complete with plenty of chairs, lots of food and drink, and no end of family and friends gathered around and my time in argentina is replete with memories of the same scenes...

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