Devaluation the Savior for Greece

Reuters / Dado Ruvic

A debt problem on the scale of Greece isn’t unique. Argentina, Ireland, the Baltic states and Iceland have also suffered similar problems. They all chose different rescue paths, varying from massive cuts to abandoning a tie up to an external currency

Wondering which would be the best way for Greece, experts at Russia’s Sberbank believe essentially the Greek economy desperately needs to become more competitive.

The average external debt to GDP ratio in the Baltic States stood on average at 67% in 2007, and in 2006 the figure for Iceland was far above Greece at 122%. The debt in Greece exceeded its GDP by 96.3% in 2007.

To bottom out Greece would need to devalue – either “internally” or in a usual form, Sberbank says. “Internal devaluation” would involve lower salaries and job cuts, mostly in the state sector. Meanwhile, a normal devaluation will mean leaving the Euro and returning to the traditional Greek drachma, Russia’s banking giant explained.

The Baltic States and Ireland have been following the first scenario since the current economic turmoil unfolded in 2008. Argentina chose to devalue in a traditional way in 2001, with Iceland doing the same in 2008.

“Internal default” in the Baltic States resulted in poor GDP dynamics, with the economy in the region falling sharply by 25% from its peak before the crisis. Iceland did better with its GDP shrinking just 5% since the peak. This could be a reflection of a better efficiency of devaluation in the country, Sberbank concludes.

Currently Greece is following the Argentinean way, Sberbank says. The Argentine scenario also included IMF funding in return for a promise of financial tightening. The South American country broke all of its undertakings, with its budget deficit standing at 2.5% of GDP in 1999 instead of the promised 1.1%. Then protests across the country followed, with the IMF rejecting any further funding. And finally the country decided to default and unlocked the tie between the peso and the US Dollar.


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