Greece may not be next Argentina-San Francisco Fed
Reuters - 01/11/2010 18:00:02
CHICAGO, Nov 1 (Reuters) - Greece is in a tighter fiscal spot than was Argentina before its 2001 debt default, but Greece's use of the euro gives it protection that the South American country lacked, a San Francisco Federal Reserve Bank researcher said on Monday.
Revelations of Greece's skyrocketing deficit precipitated Europe's first sovereign debt crisis, which reverberated around the globe last spring as investors worried about fallout from a potential default.
Despite a rescue package pulled together by fellow euro zone members and the International Monetary Fund, Greek sovereign debt is trading at levels that suggest default is still a possibility, according to San Francisco Fed economist Fernanda Nechio.
Despite some parallels between Greece's situation and Argentina's earlier in the decade, Greece is in some ways less vulnerable, Nechio argued.
"Greece's use of the euro protects it from speculative attack," she wrote in the latest San Francisco Fed Economic Letter. Moreover, Nechio said, "It gains a measure of protection by being under the monetary authority of the European Central Bank, one of whose primary objectives is the maintenance of stability in the euro area."
Greece's debt is projected to rise to 140 percent of GDP even if it implements austerity measures as planned. Even so, it is unlikely to try to withdraw from the euro as part of any debt restructuring, Nechio wrote. Argentina abandoned its currency's peg to the dollar shortly after its default.
"It is far from clear that the benefits of exchange rate flexibility would outweigh the loss of credibility that would come from forsaking the euro umbrella," she wrote. "The Greek banking system's lack of currency mismatches would make it easier to adjust to withdrawal from the euro than Argentina's experience ending its dollar peg. But the costs of establishing a new currency and exchange rate policy would be sizable."
Greece benefits from continued membership in the euro because it gets backing from other euro members in times of crisis, Nechio wrote.
As the rescue package is depleted over the next few years, those ties will be tested, she said.
For stories on Fed policy, please see (Reporting by Ann Saphir; Editing by Dan Grebler) Keywords: USA FED/GREECE