Speaking Monday at an event ago to refinance debt for Argentina’s provinces, the president of Argentina, Cristina Fernández, whose country suffered the world’s biggest sovereign debt default in 2001, made some interesting remarks on Europe’s nearly $1 trillion rescue plan.
Fernández said, among other things, that the Greek rescue package will fail because the bailout conditions repeated “the same recipes they” (IMF) applied to us, which provoked what happened (default) in 2001.”
She added that the enforced austerity to Greece will have “terrible consequences” on the Greek economy.
By the way, GDP in Greece continuous to contract at negative 0.8 percent quarter over quarter and negative 2.9 percent year over year as shown in the just released GDP numbers for the first quarter of 2010, and that even before the IMF/EU imposed austerity measures on Greece had effect on the real economy.
“They (IMF) are repeating prescriptions whereby what they are trying to do is rescue the financial system,” Fernández said.
“In the 1990s, Argentina was a devotee of the pro-market consensus and pegged the Argentine peso to the dollar, which is somewhere similar to Greece who pegged its Greek drachma to the euro, while the country racked up debt and its economy crashed. Argentina had to devalue dramatically its currency, which is not the case until now for Greece, and then became a pariah on international financial markets,” Fernández said.
“The Argentine government has never forgiven the IMF for what it considers were reckless policy prescriptions. It paid off its $10 billion debt to the lender, which was of course the IMF, in full in 2006. Argentina still refuses to submit its accounts to the IMF for reviews.”
She concluded: “Since 2003 we have been applying a totally different model that has permitted a very strong and very sustained reduction in the nation’s debt.”
Now, what happened in 2001 with Argentina defaulting on its sovereign debt didn’t have any impact at all on the U.S. dollar.
Things will be completely different with the euro when Greece and some of the “weaker” countries may be forced in the next few years to abandon the euro to save and re-stimulate efficiently their economies, unless we have a real depreciation of the euro over the next few years.
Impossible? I don’t think so.
Notwithstanding this could cause the euro to become “the European common currency that doesn’t fit for all” but instead would become once again, as in fact it has been the case before, the common currency of a smaller group of European Union member countries that have and “can” respect “stronger fiscal and economic fundamentals.”
As the IMF still expects another two to three years of recession in Greece, one could ask himself: “How much austerity and recession can Greece, as well as other weaker countries, take?”
Investors should not forget that when a “weak” country, be it Greece or whatever other country, is obliged to raise taxes and cut spending in the short run, its output is going to fall even more.
And what could even become more important by the day is the fact that all these countries belonging to the euro zone are still, literally spoken, “sovereign” countries that cannot in a sustainable way, most of all for internal political reasons, “deflate” themselves out of their problems, as there no “inflating” options left on their tables.
Yes, the European Union is not similar to the United States of America, which is a federal constitutional republic that comprises 50 states and a federal district, of which none, as we all know, has sovereign status.
Yes, these are completely different worlds.
Investors should take their time and wait until we have a nicely cheaper euro, or — why not, a cheaper German mark — back again. That would be the time to step in back again, but that’s not for tomorrow. No, that will take some time.
In the meantime, the U.S. dollar will do the job.
As you know, I’m a very strong believer in physical gold as a long-term investment, but I still can’t see us paying with gold coins, yet.
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