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A Uruguay - Greece Story

Bruce Krasting's picture


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.


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Wed, 02/10/2010 - 16:30 | Link to Comment Anonymous
Tue, 02/09/2010 - 22:39 | Link to Comment john bougerel
john bougerel's picture

Thanks Bruce for some thoughtful commentary. Some of mine:

The Greek govt, facing imminent strikes, will have to steal a page from Margaret Thatcher’s playbook. Thatcher adopted a strategy that gradually reduced the power of the trade unions. Most notable was her 11 month long victory over the coal miner union strike over Thatcher’s proposal to close unprofitable mines in 1984-1985. To win the strike, Thatcher had to build up substantial stockpiles of coal beforehand. Nigel Lawson, then Chancellor of the Exchequer, later recalled, “The miners strike was the central political event of the second Thatcher Administration…the eventual defeat of the [coalminers] etched in the public mind the end of militant trade unionism which had wrecked the economy and twice played a part in driving elected governments from office.”

 What the Greek govt is about to undergo in confronting striking public unions will be akin to the challenges faced by Thatcher in the 1980s. And the public union challenges that the Greek govt is about to confront beginning on Wednesday are the same challenges the rest of the PIIGS will be facing and all developed countries in the months and years ahead, including the US. Unfortunately, none of today’s leaders appear to have the backbone, savvy, or the political will and resolve of a Margaret Thatcher. Though the Greek govt says they are up to and committed to the challenges that lie ahead. Developments of striking unions in Greece bear watching closely.

Tue, 02/09/2010 - 22:32 | Link to Comment Anonymous
Tue, 02/09/2010 - 22:30 | Link to Comment Anonymous
Wed, 02/10/2010 - 00:56 | Link to Comment Bruce Krasting
Bruce Krasting's picture

Argue your point with the Anon below. He is arguing that the devale was 'only" 70% and not the 90 I cited. These people had no access to the "official rates" they suffered more than the official devaluation.

But either way, 75 or 90% it is still a loss. If you earn devalued peso and owe revalued dollars you have a problem.

This situation exists today in Eastern Europe. People got credit cards in Swiss Francs. Now their debt costs more.

Wed, 02/10/2010 - 00:48 | Link to Comment Bruce Krasting
Bruce Krasting's picture

I cited the CIA world factbook. Here is the link


This is a picture of the page. Number says $2.4t yes? So what is the difference? I think your number is public sector only. You calling the CIA a liar?


Tue, 02/09/2010 - 19:57 | Link to Comment Anonymous
Tue, 02/09/2010 - 19:01 | Link to Comment Anonymous
Tue, 02/09/2010 - 18:42 | Link to Comment Anonymous
Tue, 02/09/2010 - 18:06 | Link to Comment ShankyS
ShankyS's picture

Bob Janjuah should take writing lessons from you.

Tue, 02/09/2010 - 18:53 | Link to Comment Bruce Krasting
Bruce Krasting's picture

Me, I love Bob J. Glad to see his stuff.



Tue, 02/09/2010 - 21:38 | Link to Comment ShankyS
ShankyS's picture

I'm not totally dissin Bob. I normally like his stuff. Maybe I'm being a little harsh on his post today. Better to keep an open mind.

Tue, 02/09/2010 - 23:43 | Link to Comment Anonymous
Tue, 02/09/2010 - 17:59 | Link to Comment Anonymous
Tue, 02/09/2010 - 18:56 | Link to Comment Bruce Krasting
Bruce Krasting's picture

Nice people too.

Tue, 02/09/2010 - 17:55 | Link to Comment walküre
walküre's picture

"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"

Does anyone care about banksters?

Tue, 02/09/2010 - 17:45 | Link to Comment Anonymous
Wed, 02/10/2010 - 01:46 | Link to Comment Bruce Krasting
Bruce Krasting's picture

Over 12 months the suffered more than the 50% you suggest. There is a guy above arguing that it was 75%. These people did not have acess to official rates.

I worked through this over a period of time. The owed dollars to the lenders. That amount did not change (we settled for 25% in dollars).

Their incomes were in local currency. They got spanked.

Tue, 02/09/2010 - 19:21 | Link to Comment Anonymous
Wed, 02/10/2010 - 01:16 | Link to Comment Bruce Krasting
Bruce Krasting's picture

The appearance of prosperity was preserved with an overvalued currency. When the deval rolled through it reversed and exposed what was going on. In the process it unwound many years (is that better than decade?) of 'prosperity'. These people I know suffered from it. I saw it myself when I went to Argentina in 2003.

But when a country goes through that gut wrenching transition  they come out in a better place. After the 'crisis' Uruguay stabilized and has done well. Like I said, the folks I know were happy to go back. They did not like the USA. They are now both working and doing okay. They have it better than a lot of Americans are looking at today.

Wed, 02/10/2010 - 10:46 | Link to Comment Anonymous
Tue, 02/09/2010 - 17:43 | Link to Comment Shiznit Diggity
Shiznit Diggity's picture

Upshot: short the relief rally that ensues from the Greek pseudo-bailout

Tue, 02/09/2010 - 17:15 | Link to Comment A Man without Q...
A Man without Qualities's picture

Of course, borrowers in Iceland had their ISK loans re-denominated into Euro after the country defaulted, which strikes me as even worse than finding out your currency peg has broken.

Tue, 02/09/2010 - 17:15 | Link to Comment Budd Fox
Budd Fox's picture

I may be too old....but when the Germans come to the rescue, yesterday you could expect Panzerdivisionen...nowadays you can expect an army ov very strrict accountants.

Both times, it will mean the decisions will be taken by a Kommandantur which Kommandant will be a chief accountant this time.

How long Greece and Greek people will tolerate? They didn't tolerate an ocuupation enforced with guns...enforcing it with treaties on money??

Good luck..

Tue, 02/09/2010 - 17:14 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

Good post.  The Euro will not survive beyond 2010, a two-tiered Euro is no Euro.

Tue, 02/09/2010 - 17:10 | Link to Comment ZerOhead
ZerOhead's picture

These PIIGS won't fly!

(For long anyway!)

Tue, 02/09/2010 - 21:25 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

Sure they'll fly!  If someone will come along and bailout irresposanble countries, then fly they will!

Look for more PIIGS bailouts followed by California, Illinois (of course!), New York, etc.

Those of us who have been savers and prudent are about to get hosed.  The German taxpayers must be irked.

Tue, 02/09/2010 - 17:08 | Link to Comment Invisible Hand
Invisible Hand's picture


I understand the downside to a bailout to Germany (and I don't think they should, or can, do it for moral hazard reasons, if nothing else)

However, I don't see, in your article, what solution you think is the best for Greece, in particular, and for Europe, as a whole.

Not just academic interest because I think we will be facing similar issues with states soon (are already, but won't admit that the stimulus was "stealth bailout" of states).  When the stimulus ends, we will have to decide how to address this.

Thanks for any thoughts...

Tue, 02/09/2010 - 17:31 | Link to Comment Anonymous
Tue, 02/09/2010 - 18:53 | Link to Comment E pluribus unum
E pluribus unum's picture

Marcello and Sylvia should have defaulted too. Fuck the banksters

Tue, 02/09/2010 - 17:04 | Link to Comment AR
AR's picture

BRUCE / Your thesis is very plausible. We on ZH regularily discuss bond and debt markets. Thus, have you ever read the following two books:

1)  Money, Bank Credit, and Economic Cycles (By: Jesus Huerto de Soto} {Link: }

2)  The Ascent of Money { By: Niall Ferguson }

The Mises book is quite detailed (900-1000 pages). The second by Ferguson (400 pages) is more superficial. Reason? All of us need to better understand the origination of money and their relationship to the debt markets. Lastly, thanks for always taking the time to provide the ZH readership with your comments and theories.



Tue, 02/09/2010 - 17:02 | Link to Comment GoodBanker
GoodBanker's picture

"Should something like that happen there will be millions of Sylvie and Marcello’s"

Perhaps that's the best-case scenario. How the hell do the banksters collect on multinational, unserviceable, cross-currency denominated retail debt when defaults reach pandemic proportions? It may be difficult for the bottom 10% of a country to give the collective finger to the banking oligarchs, but 51% of a nation... seems a little more difficult.

Excellent writing as usual, Bruce. I look forward to your future missives.

Tue, 02/09/2010 - 16:57 | Link to Comment bugs_
bugs_'s picture

No Bozos errr Bonos.

Tue, 02/09/2010 - 21:22 | Link to Comment Squid-puppets a...
Squid-puppets a-go-go's picture

thank heavens - that bono guy is really annoying

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