Grexit debate down but not out, Argentina lessons remain

Wed Jul 22, 2015 2:49am EDT
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By Jamie McGeever

LONDON (Reuters) - Greece just narrowly avoided crashing out of the euro but for skeptics the clock is already ticking on when large-scale default and exit from the "irreversible" euro club are raised once again.

When it is - be that in two months or two years - the lessons from Argentina are sure to be revisited.

Argentina's $100 billion default in 2001 was the largest in history. It yanked the peso from its peg to the dollar and resulted in a 75 percent devaluation.

This shattered the economy. Real gross domestic product slumped 15 percent, inflation reached 40 percent, and household and business finances were crippled. To this day, the government remains cut off from international capital markets.

But, with the aid of serendipitous global economic conditions, Argentina's economy soon recovered.

So severe has been the recession in Greece since 2008 and so great are its debts, that some economists say Greece might be best served also crashing out of its currency union. Could a new drachma, 50 percent cheaper than the euro, be the catalyst for recovery?

"The parallels with Argentina are there. A broken banking system, an unsustainable debt, and the need to restore and enhance international competitiveness," said Barry Eichengreen, professor of economics and political science at the University of California, Berkeley.

"But there are reasons to think that reintroduction of the drachma and devaluation would do less for Greece than devaluation did for Argentina. Greece is less open, it exports less," he said.   Continued...

A frayed Greek national flag flutters among antennas atop a building in central Athens, Greece July 20, 2015.  REUTERS/Alkis Konstantinidis