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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Anonymous's picture

Hmm, as a Uruguayan native whose business suffered the crisis big time, I can tell you the details of Marcelo and Silvie sound very fishy.

First off, the economy had sucked for YEARS in Uruguay before the alleged crisis, so there were no gains to wipe, and if they had been borrowing during that recessionary period, to the tune of $50k, based on salaries, by Uruguayan standards they were insane.

This may sound average by US standards, but I repeat, by URUGUAYAN standards $50k of debt is a load only a company will undertake, with revenues about 10 times as much, not just 2x.

And also, there is no "education debt" in Uruguay, because there simply are no student loans and education costs a tiny fraction of what it costs in the US, and mostly higher education is free.

As the other commenters said, the devaluation was nothing like 90%.

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.

Anonymous's picture

I always look for your articles Bruce, thanks again. One thought though, the banksters never get stuck because they never loan their own money. Profits we win, defaults you lose.

Anonymous's picture

Three points:
1. The Uruguayan story is BS, or extremely distorted at best.
2. Spain's NET external debt is 900 billion euros, or $1.25 trillion. (90% of GDP)
3. The Argentinian Government devalued the peso asymmetrically: 1.4 peso for 1 dollar if you were a depositor, 1 peso for 1 dollar if you were a debtor. One day you'd owe 10,000 US dollars and next day you'd wake up owing only 10,000 Arg. pesos! It was a HUGE windfall for debtors.

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.

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?


Anonymous's picture

Argentina used the austral from 1985-91 - they devalued the *peso* in 2002. And Argentine and Uruguay saw their currencies fall ~70% in 2002, not 90%.

Anonymous's picture

Two thoughts:

1. Sylvie and Marcello were half right. They should vow never to borrow in ANY CURRENCY ever again.

2. We won't see those handbills in Detroit. There are no people left in Detroit to post them.

Anonymous's picture

what's the problem with defaulting on the debt -- that's one of the reasons why those who purchase debt charge the interest that they do (ie the risk premium), and and why the value of the debt fluctuates in price

claiming that defaulting on the debt is unthinkable, is simply posturing from the point of view of the debt holders -- they're trying to have their cake and eat it too

the capital markets have short memories: back when the IMF was imposing their structural adjustment programs on the third world, there was a study (unfortunately i don't have it hand) that showed that a few years after defaulting on their debt, some countries were able to tap the credit markets again, paying LOWER interest rates than countries that had not defaulted and that had followed the IMF's dictate to not default at any cost by imposing severe austerity programs

ShankyS's picture

Bob Janjuah should take writing lessons from you.

Bruce Krasting's picture

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



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.

Anonymous's picture

Bob is hopeful, like most of the less-Uber bears out there (Calling Bob a less-Uber bear is strange), that governments would do the right thing, and that political pressure will bring to bear the changes needed in the fiscal balances of the countries.

I, unfortunately, have lost all faith in the government (if you can still call it that) being able to look beyond the next month, or the next trading day. The short-termism of politica and financial markets will put in policies that will destroy the future for our progeny. There are those who believe that the PEOPLE will make the decision. Somehow, I have a bad feeling that by the time the PEOPLE wake up, it will be too late and the banksters/crooks/cronies would have absconded with the wealth of the nation, leaving behind a mountain of debt from which there can be no escape.

As for Greece, they have lied about their fiscal position to join the EU, and since joining the EU, they have lied about their fiscal deficits. The whole point of the EU rules on government debt and deficit was to prevent this very situation from occuring. If member countries continue to flaunt the rules/constitution, where can the stability come from? This is the biggest problem facing the EU. HOW DO YOU ENFORCE COMPLIANCE? This experiment going on in Europe will end badly if member states and its citizens do not realise that membership requires responsibility. EU should not bail out Greece. And it should not bail out Spain, Portugal, Italy, Ireland.. etc. Each of these countries took a position of responsibility when they decided to join the EU. Unfortunately, a lot of these countries did not walk the walk. Now is the time to pay the price. For Greece to remain credible, it has to adopt the policies that will enable it to repair its balance sheet. If it means the Thatcher doctrine, so be it. The Greeks must understand the position they are in.

And EU mustn't be afraid to cut Greece loose. I think Greece will be the loser, not the winner, if that happens.

Wolf in the Wilds

Anonymous's picture

The Uruguayan Peso was not pegged to the dollar before the financial crisis in 2002. However, most loans at that time were taken out in dollars. So your post still holds, although some of your facts are wrong.

By the way, in the last two years the Uruguayan economy has proved itself to be among the most resilient on the continent. Sure, it's a small and marginal economy. But the Central Bank has shown responsibility in setting interest rates; the economy was not allowed to overheat, and domestic consumption kicked in just as foreign demand fell off.

The aces up Uruguay's sleeve? Water reserves, potential hydrocarbon reserves, farmland, and a northern border shared with Brazil.

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?

Anonymous's picture

There are many, many factual errors in this post. Many are forgivable; e.g., Uruguay had a currency band prior to 2002, not a fixed board; the Peso Uruguayo dropped a little over 50% against the dollar when the band was dropped, not 90%; the Austral was gone before Menem, and long before the devaluation of the ARS; in Argentina dollar loans from national banks were automatically peso-ized following the devaluation, many private lenders trying to collect in dollars were subjected to rough justice in the courts. One assertion, however, is really off base -- there was not a lost decade of growth following the devaluation, but rather Uruguay has had a tremendous amount of growth in the past 8 years and continues to do quite well (especially because Los Kirchner are driving lots of Argentine wealth across the river).

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.

Anonymous's picture

Perhaps he meant that the crisis wiped out a decade's worth of economic progress; in other words, the gains of the 90s.

But yes, Uruguay has enjoyed five years of record economic expansion and finds itself in an enviable position, although public debt has grown 30% in the interim (http://uruguayeconomico.blogspot.com/). Given record commodity prices, the government missed an opportunity to pare down its debt load.

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.

Anonymous's picture

I relocated to Montevideo from New York City in 2007 and I don't regret the move.

Shiznit Diggity's picture

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

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.

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..

ghostfaceinvestah's picture

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

ZerOhead's picture

These PIIGS won't fly!

(For long anyway!)

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.

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...

Anonymous's picture

Greece (and Iceland)should default on the debt, of course.

Happens all the time in Latin America, a few years later the credit is flowing freely again - with the same outcome. And for a few, short, golden years the yield on foreign bonds will match the risk. This is good.

E pluribus unum's picture

Marcello and Sylvia should have defaulted too. Fuck the banksters

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: http://mises.org/store/Money-Bank-Credit-and-Economic-Cycles-P290C0.aspx }

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.



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.

bugs_'s picture

No Bozos errr Bonos.

Squid-puppets a-go-go's picture

thank heavens - that bono guy is really annoying