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In this post I’m willing to discuss an investment thesis that started when the Greek crisis was on its way, and now is brought back by Ireland’s liquidity problems. This thesis is related to one of the biggest financial crisis the world saw before Lehman’s collapse: I’m talking about Argentina crisis in 2001. I know it has plenty of differences between what we can see nowadays in some European countries, but it has some important similarities that makes me think, history always repeats itself.
The main similarities can be found on a fixed exchange rate (one Argentine peso = one US dollar), poor macroeconomic performance by similar countries (1998 Russian Crisis), hungry speculators willing to take profits even if it involves collapsing a country, unsustainable amounts of debt (Argentina 2001 public debt/GDP = 65%1) and a compromised banking system. Also there are some social issues that are starting to
arise in Europe, which were a huge problem in Argentina, but I will try to focus only in the economic and financial part of the crisis.
Trying to summarize a little bit of 2001 crisis, after having some trouble with maturity payments, the government received loans from IMF and World Bank which helped to calm investors for just a couple of months. But liquidity doubts reappeared, and in a stronger way, which led to an unsustainable situation where the government was “forced” to declare default and break the fixed exchange rate regime. The situation in Greece and Ireland differs in the credibility investors have towards the support of institutions such as ECB and IMF. So drastic events such as default and countries leaving the euro are not likely to happen. It seems obvious that they will be ready to help in ANY possible way, as the impact of one of this countries failing, could be devastating over the whole world economy. Instead, Argentina’s failure only harmed a few EM countries and some investors in developed countries, such as Spain and Italy.
So how can an investor take advantage of history repeating? The idea was to compare what is happening nowadays to the banking system (owned by the government or with important amounts of sovereign debt) in Ireland and Greece to what happened in