Greek drama is based on previous plays

John Osbon - June 29, 2011

Modern Western theatre as we know it is said to have originated 2600 years ago in Athens, with Thespis as the first winner of a theatrical contest.  The world could use an orator like him now to explain to the unhappy masses what an awful economic mess they are in.  How will they get out? We have four examples to look at for the answer.

New York, Brazil, Russia, Argentina. Over the last four decades, these four countries (NYC is a country to me) faced and got through severe economic crises brought on by excessive debt.  Countries can’t go bankrupt, but they can default.  Two countries did, and the other two “worked it out.” Although the dramas played out in different ways, all four scripts ended in similar ways: boom times 5-10 years later.

“Ford to City: Drop Dead”

Although President Ford never actually spoke these words, people living in the city at the time, including me, will never forget the famous New York Daily News headline on the morning of October 30, 1975.  Like Greece today, New York City had been heading towards bankruptcy for years through financial mismanagement, poor leadership, and avoidance of economic reality.  The city actually defaulted for several hours on the morning of October 19th, 1975, until $150 million from the teacher’s pension fund put the city back in business. The long-term rescue came from MAC, the Municipal Assistance Corporation, which sold bonds that funded the city for the next 30 years as it temporarily stripped the city of much of its economic self-governance.  MAC ended in 2008, a great success.

Living La Vida Loca

Eight Latin American countries were at or near default in March, 1989, when Brady Bonds, truly complicated financially engineered instruments, were issued in exchange for bank loans to those countries.  It took many years, but the Brady plan worked exactly as planned, buying time, extending debt, freeing capital, fortifying credit. Brazil now has $316b of US Treasury bonds as reserves, Mexico $123B. The current “rollover” plan for Greece has many elements in common with the Brady plan.

Nyet!

Plagued by fiscal mismanagement and an overvalued currency, Russia defaulted on more than $130 billion of domestic debt and devalued the ruble in August 1998.  The Russian stock market plunged 65%; the US stock market fell 14% in one month. However, the crisis was fairly short lived, since oil prices began their decade long march straight upward at almost exactly that moment.  Russia now owns $465b of US Treasury debt as excess reserves.

Don’t cry for me….

Argentina earned instant international pariah status by defaulting on $132b of debt in December 2001.  Further, the peso was delinked from the US dollar and plunged 80 percent.  What came next is a familiar story: bankruptcies, riots, violence, government collapse, and so on.  Today?  A recent NY Times article noted that the Argentine economy has grown 8 percent annually since 2003, and it runs a trade surplus.  Is the situation there perfect? No, but surely better.

Greece could be a hit

It is impossible to know exactly how the current mess in Greece will resolve. But it will resolve somehow. As painful as it can be, on both a national and human scale, an economic crisis is often a cleansing, cathartic experience. After the real human cost in Greece is paid – savings wiped out, homelessness, possibly a military coup and loss of civil rights – it would not surprise me to see Greece come out the other side as a financially healthy booming tourist destination, a la NYC/Brazil.

Anyone thinking of giving up on Greece should consider the long-term turnaround in New York.  John D. Rockefeller III sold his 34-room Park Avenue apartment for $225,000 in the ‘70’s; it resold for $30m+ in 2001, a 30 year compound appreciation of 16.3% per year.

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