Commenter Post on Country Default - A look at Argentina (SlopeOfHope)

ricosauve Just now in reply to Profiteer.me

I've been studying Argentina in the 1990's as an example of a country that defaults. Essentially, two things happen. People rush out of the government bonds, and rush out of the currency. Basically, that much action simultaneously causes concern for the common stock holders of the country, who rush for the exits. That leaves, the local businesses loans as a concern. With the currency depreciated so much, and since most the business loans/mortgages, which were funded by the local banks in USD, but loaned out in Argentinian Pesos, immediately bankrupt the banks who did that, leaving very little credit available to the economy, reducing medium to long term demand. Also interest payments skyrocketed, and well that sucked cash away from Consumers.

Additionally the swing in currency values, which causes hell with the price of imports, is a boon for exporters. However, when the price of oil in a country spikes 20-30% in a matter of months in the local currency you get into a situation of extreme inflation, because the consumers keep consuming, yet basic goods have risen in price.

Then Argentina defaulted on their government debt told everyone to hell, and that has left a bitter taste in the mouth of bond investors worldwide. They have in the last five years started to restore their credit, however have been heavily relying on Venezuelan support, to the disgust of almost everyone on Wall Street.

Now, the Argentinian crisis is much different that the EU and the EUM. Comparing the economies of Argentina to the EU would be very appropriate but its something that I haven't done.

I don't think the EU will have as much of a problem as Argentina, however, given the politics things could move much more slowly.

To conclude I want to say two things. First, is that the world is not going to even if all the PIGS default and are bailed out, left to rot. Second, that whatever damage is done by the bailout/shutin will have iterative affects on both the main street economies and the fiscal markets.

ricosauve Just now (1150am EST)

I swear to god, I'll drop Greece but i will point out this one thing. Germany wants some sort of political control over greece if they bail them out. The irony comes from Germany twice before in the last century trying to gain political control over Europe through expensive military action and failed. Here they may have succeeded simply by keeping a balanced budget.

Eldar Bob Just now in reply to ricosauve

You might be interested in the Documentary "Z" which dealt with Greek civil strife in the 60s. Nice exposition on the civil fragility of the modern democratic state.