Don't cry for me Greco-tina

People, we've seen this movie before. Greece is Argentina II.

The parallels are uncanny. Insolvency was mistaken for illiquidity. Devaluation was shunned. A big loan package was created with conditions. Conditions weren't met, but installments of the loan were still given (this has only been announced for Greece, it hasn't actually happened yet), and now a "second last chance" loan is being prepared.

All the while the economy and institutions of the country continue relentlessly downward.

The only ones getting bailed out here are the banks who have big exposure to Greek debt. Greece itself is not getting bailed out, it is getting deeper and deeper in debt!

I understand that a currency union is harder to get out of than a currency board, but the combination of fiscal irresponsibility and a fixed exchange rate is just lethal in our era of capital mobility.

Greece needs the ghost of Nestor Kirchner to swim over and give them the onions to simply default.

Exchange Rates

My man T-Oat kicks Danny D right in the monads...

The Venezuelan devaluation

The Bolivar has been pegged at 2.15 to the dollar for about 5 years. Over those 5 years, Venezuelan inflation has ranged from 15 - 30 percent per year while US inflation ranged from 0 to 5 percent per year. That is to say, unless the Bolivar was massively overvalued when pegged in early 2005, it has become way overvalued. Yesterday, President Chavez ordered the devaluation of the Bolivar to 4.3 per dollar (2.6 per dollar for some specific imported goods).

Chavez did a pretty good job of explaining the Venezuelan situation as one of a country suffering from the Dutch disease. It heavily exports a primary commodity, which supposedly causes currency appreciation and hurts manufacturing. He emphasized that the country needed to overcome this problem and produce stuff, not just pump stuff out of the ground. Here is a relevant fragment from his TV show:

The devaluation is good policy for sure. I am not crazy about the tiers and controls, and opposition leaders in the country say Chavez will use the increased local currency revenues from oil exports to boost domestic spending in advance of elections, but it is the correct move for the country at this time (and should have been done much sooner). Fixing the nominal exchange rate to a country whose inflation rate you are unwilling to match is a recipe for economic disaster that we have seen cooked up over and over again in Latin America.  Venezuela is getting out before the disaster hits, at least this time.