Marcello, his wife Sylvie and their three kids lived in Montevideo,
Uruguay in 2002. They were in their early 30’s and life was pretty
good. Sylvie had a license to practice dentistry. It is a different
standard then what we know. But she had education debt and she borrowed
to build an office. She also borrowed $10,000 to pay for “license”
required to open a business.
They borrowed money to buy cars, they had credit card debt. They did
not look much different than your average American family. Their income
was close to $100k; they had debt of $50k. A problem, but not a crisis.
Nearby Argentina had “Dollarized” its economy a decade before. Uruguay
did the same. For years there were big benefits from linking to the
dollar. Inflation collapsed. The availability of credit expanded
dramatically, the economy prospered.
Sylvie and Marcello earned $100k in Uruguayan Pesos. The debt was in
dollars. As long as the exchange rate of the UPeso was fixed there was
not problem. But in 2002 there was a big problem. The charade of tying
a local currency to a reserve currency at a fixed parity ended very
badly. The Argentine Austral and the UPeso ended up devaluing by 90%.
Think of Sylvie and Marcello, they went to bed one night owing $50,000
and woke up in the morning owing $450,000. (It actually took a year)
They were busted. What could they do to get out from under? The whole
family left the country and came to the US on a tourist visa. And
Marcello worked off the books seven days a week to earn the dollars he
needed to support his family and try to pay back the dollar debt.
These people weren’t dead beats. To me they were like any middle class
family that got squeezed. They wanted to honor their debt and get back
to living. The only choice to do that was to get an income in dollars.
Their Peso income would no longer cover the debt.
A few years after they got here I got involved and negotiated a
settlement with the various Uruguayan banksters that had lent them the
dollars and put them at risk. We paid 25 cents on the dollar, so that
meant the debt was cut to $14,000. Sylvie left with the kids. Marcello
stayed for a while longer so he could pay me the 14k. A solid guy, he
settled with everyone. They are all back home now. Life is okay again.
They will never borrow money in dollars again.
There are similarities to Uruguay in 2002 and the PIIGS in 2010. Both
converted/pegged their domestic currency to a much stronger reserve
currency. The same benefits of reduced inflation and economic growth
have followed as a result. But so has debt creation. Both in the public
sector and the private sector.
The CIA puts Spain’s external debt (mostly Euro denominated) in 2004 at
$780B. Six years later the same source put the number at over $2
Trillion. And that is why we have a problem today.
The pressure is mounting for “something” to be done. The argument,
“Greece should float out of the Euro” or, “There should be a two tiered
Euro” is gaining some traction. While this process will ebb and flow
throughout the year, it really has only one direction to go. It’s going
to get worse. The idea that the PIIGS will work this out with budget
cuts is just wrong headed. That is not going to happen. The development
today where it appears that a lifeline may be extended to Greece is
going to backfire on Germany. There will be too many hands sticking out
requesting a soft loan. The steps that may come in the next few days
may serve to defuse the problem. But the fuse will get re-lit before
too long. At that point it will be a short fuse and nearly impossible
to put out.
It is impossible to predict what will happen at this point. But if the
resolution of this results in some fundamental realignment within the
Euro Zone there is going to be a lot of pain. The end result will not
be anywhere near as extreme as what happened in Uruguay. But we could
end up with a two-tiered Euro that has a 20% or more premium from the
Strong to the Weak.
Should something like that happen there will be millions of Sylvie and
Marcello’s. The banksters will get stuck again, the economies will
suffer, and like in Uruguay there will be a lost decade of growth.
At the moment that still seems to be the most likely outcome. We will
find out in the next few days. If the lifeline to Greece is actually
just a thin thread and a quid pro quo promise of major budget cuts in
Greece then this is going to end badly. There will be tractors all over
Athens. They love the German tourists, but there is no way the Germans
are going to dictate to the Greeks.