Argentina, Asia rebounds offer false hope for Greece
By Philip Blenkinsop
Greece should not be lulled into believing an exit from the euro would lead to the sort of short shock and sharp rebound that Argentina and Asian nations experienced when they devalued their currencies more than a decade ago.
The experience of other countries suggests that Greece too could benefit after the turmoil from eurozone expulsion subsides. But the hard data suggests, and economists believe, it would be too weak alone to lift itself out of trouble.
"It's one thing to leave a currency peg, quite something else to leave a currency. It's not a magic wand that you can wave to solve all of Greece's problems,» said Nick Kounis, head of macro research at ABN AMRO.
Argentina's experience after defaulting and abandoning its currency peg in 2001-2002 is the most encouraging. Its economy shrank for four successive years from 1999 to 2002, including a 10.9 percent contraction in the final year, but then grew by on average 9 percent in the subsequent five.
The Asian financial crisis of 1997 saw a domino effect across the regions as markets attacked what they saw as overvalued currencies, forcing the IMF to bail out several countries. Within a few years, they were prospering again, largely on the back of exports made more competitive by their lower exchange rates.
Could that be a model for Greece, set for a fifth year of recession in 2012?
Optimists point to the strongly price-sensitive nature of the products Greece exports.
According to Thomson Reuters Datastream, there is a tight negative correlation between the balance of payments of periphery nations such as Greece and the dollar/euro exchange rate.
In simple terms, a stronger euro tends to depress trade of these countries and a weaker currency boosts it.
In the past year, the euro has declined by 6 percent on a trade-weighted basis, according to ECB data, while austerity in Greece had led to an internal devaluation of some 15 percent there via factors such as falling wages, economists say.
Greece's export sector has taken advantage, with sales of its goods abroad rising 37 percent in 2011 and by 19 percent in the first two months of this year. Tourist arrivals grew by 14 percent in the first eight months of 2011, perhaps helped by unrest in North Africa.
However, while imports dropped 10 percent last year, Greece still incurred a trade deficit of 20.8 billion euros, the fifth highest in the 27-member European Union.
EXPORTS DWARFED BY IMPORTS
The key problem is that exports are continually dwarfed by imports and represent only just over 20 percent of gross domestic product (GDP).
And for a country with that level of reliance on goods brought in from abroad, a heavily devalued currency means one thing -- rampant inflation.
Greece, for example, imports nearly all its energy needs.
And its export surge so far has done little to boost economic growth, given the lower wages that led to it have destroyed domestic consumption.
The problem can be fixed. Argentina's exports/GDP ratio shot up to 28 percent in 2002 from 12 percent in 2001, a sharp surge even accounting for the fall of GDP, and it swung into a current account surplus after 11 straight years of deficit.
After the Asia currency crisis, South Korea's export/GDP ratio hit 46 percent from 32 percent before. For Indonesia, it leapt to 53 percent from 28 percent. Both also turned from current account deficits to surpluses.
Economists doubt Greece could recreate their successes.
Argentina and the Asian nations could rely on an otherwise relatively robust global economy, a luxury not afforded to Greece. Argentina benefited from a commodity boom in 2003-2004.
"Greece's exit could itself do such damage that its export markets would suffer,» said ABN AMRO's Kounis, referring to other eurozone nations which could be hit by a contagion effect from a Greek euro departure.
Greece's chief exports are agriculture, shipping and the main one, tourism, which accounts for some 18 percent of GDP.
But could it really squeeze in more than the 15 to 16 million people it typically hosts per year and can it really expect them on average to be spending more, particularly if they are drawn to the country on the basis of cheaper holidays?
Tourism is also a unique form of export -- people have to visit the country, in the case of Greece a country in crisis.
"I think social unrest will be significant. Tourists, you can imagine, would wait for the situation to stabilize ... It could take much longer for Greece to benefit than for countries just exporting goods,» said Peter Vanden Houte, chief economist at ING Belgium.
Economists say the palliative of devaluation could also slow necessary progress on issues such as tax compliance, a bloated public sector and inefficient public spending.
"The underlying structure of the economy needs to be changed,» said Marco Valli, chief eurozone economist at UniCredit, adding a Greek exit might help a few sectors, but would import inflation and drive energy prices «through the roof».
"Greece does not have the conditions to benefit from a strong devaluation,» said ING's Vanden Houte. «It's not like South Korea, a strong industrial country, and the comparisons with Argentina are far-fetched.» [Reuters]