Bloomberg News

Bankers Advise Greece Don’t Cry Like Argentina: Cutting Research

June 21, 2012

Bankers Advise Greece Don’t Cry Like Argentina

A European Union flag, left, is seen flying alongside a Greek national flag in Athens. Photographer: Chris Ratcliffe/Bloomberg

Greece wouldn’t be able to emulate Argentina’s post-crisis recovery should it decide to seek economic solace by quitting the currency shared by 17 European countries.

That’s the conclusion of a June 15 study by economists Gustavo Canonero and Gilles Moec of Deutsche Bank AG. They use it as reason to warn Greece that the cost of embracing default and devaluation “would go far beyond” the pain of the austerity measures required to stay in the euro.

Argentina reneged on its debt and abandoned its link to the dollar at the start of 2002, paving the way for a 20 percent slump in output over three years and unemployment as high as 23 percent. While the switch was brutal at first, the Deutsche Bank economists found Argentina was blessed by stronger fundamentals and other sources of economic growth that helped drive a rapid recovery. After contracting 11 percent in 2002, the Argentine economy expanded about 9 percent in each of the next three years.

The bad news for Greece is it’s not so blessed. For one thing, Greece’s public and external debt, as well as its current account deficit, are two to three times bigger than Argentina’s were before its turmoil, said Canonero and Moec.

Argentina also benefited from increased demand for its exports, made cheaper by devaluation, as well as acceleration in the economy of Brazil, a major trading partner. Meantime, higher global prices helped lift the cost of soybeans, which represented about 6 percent of Argentine gross domestic product and helped boost tax revenues.

“Nothing of that sort is expected to be present in the case of Greece, with its negative commodity balance and limited exportable production, lackluster regional growth and inadequate productivity growth,” wrote Canonero and Moec.

In their estimates, even a controlled 50 percent devaluation would slice 15 percent from Greek GDP in the first year on a price-adjusted basis and propel annual inflation to 10 percent in the three years after default.

* * *

Declining trade among euro countries is set to offset the economic boost of a falling exchange rate for the region’s major economies, according to Societe Generale SA.

The euro’s slide, which includes dropping about 12 percent against the dollar in the past year, should add 0.5 percentage point to the euro countries’ gross domestic product over the next year, estimated economist Michel Martinez in a June 15 report.

That positive force will nevertheless be countered by falling shipments inside the bloc, he said. Trading with neighbors in the euro region accounts for about 4 percent of GDP in the so-called core economies, including France and Germany. That’s fallen by about 10 percent in a year and set to wipe off another 0.3 percentage point from growth through next year, Martinez found.

“Intra-zone trade alone is expected to neutralize much of the positive exchange-rate effect for the core countries,” he said.

Aggregate imports for Greece, Ireland, Italy, Portugal and Spain all have weakened since the middle of last year and contracted 10 percent versus their 2011 average in the first quarter. France sends 18 percent of its exports to those countries and Germany 11 percent, Martinez estimated.

* * *

England soccer fans would be willing to sacrifice more than supporters of Italy would if it meant their team beat the other this weekend in the quarterfinals of the European championship, according to a poll of 16,000 people by ING Groep NV released on June 21.

England supporters would be willing to pay 207 euros ($260) if it meant their national side securing a victory, while Italians would part with 167 euros. Workers from both countries say they would surrender two days of vacation in return for a win. Twelve percent of the English would hand over 1 percent of their income to guarantee success, compared with 8 percent of Italians.

“Football exposes some fascinating economics lessons,” wrote Ian Bright, an ING economist in London. “One of them is the need to control emotions. On the field, sticking to a long- term plan and trusting objective statistics can keep emotions under control and, in the long run, may bring better results. The same can hold true off the field as well.”

* * *

There is a growing global mismatch in the supply of workers, according to McKinsey & Co.’s research division.

It estimates in a June 14 report that by 2020 the global labor force of 3.5 billion will include about 85 million too few high-and medium-skilled workers and around 90 million too many low-skilled people.

Income inequality will climb as those without qualifications suffer unemployment and stagnating wages, said authors led by Richard Dobbs.

Using trends in demographics, labor markets and education in 70 countries, the report by the McKinsey Global Institute projected that in 18 years there will be around 40 million fewer workers with college training than employers need. Developing countries will have 45 million too few people with secondary education.

“For the global labor market to continue to deliver benefits to all workers, employers and national economies over the next 30 years, these imbalances must be avoided,” the study said. That requires “a concerted, global effort by governments and businesses to raise educational attainment and provide job- specific training.”

* * *

Policy makers must be on alert for “unfinished” recessions when coming to the rescue of economies they fear may be threatened by slumps in stock prices.

A study released last week by economists from the Basel, Switzerland-based Bank for International Settlements found authorities sometimes ignore the medium-term performance of financial assets when trying to protect economic growth.

That happens when policy makers “overreact” to short-term developments and lose sight of the financial trends behind them. That “can store up bigger trouble down the road,” wrote economists Mathias Drehmann, Claudio Borio and Kostas Tsatsaronis.

On three occasions, in the mid-1980s, early 1990s and from 2001 to 2007, policy makers reacted to declines in equity prices only to discover shares weren’t a reliable indicator of financial conditions, the authors said.

After the stock-market crashes of 1987 and 2001 “credit and property prices continued to increase, benefitting from a second breath of life,” the economists wrote. “A few years later, the credit and property booms in turn collapsed, causing serious financial disruptions and dragging down the economy with them.”

“Policy responses that fail to take (medium-term) financial cycles into account can help contain recessions in the short run, but at the expense of larger recessions down the road,” the study said.

The report also found financial cycles have increased in length since the 1980s amid greater liberalization. Their peaks are closely associated with systematic banking turmoil, it said.

Recessions coinciding with the contraction of finance are particularly severe given gross domestic product drops by 50 percent more than otherwise, the report said.

* * *

Venture capitalists looking to unite with others should focus more on working with people of similar skills than those with whom they share similarities or interests.

In researching “The Cost of Friendship,” economists Paul Gompers, Vladimir Mukharlyamov and Yuhai Xuan found collaborations are most likely to happen between people who have similar abilities, such as degrees from a top university, and between those who have an affinity, such as having attended the same school.

The economists, in a working paper for the National Bureau of Economic Research, used a data set of 3,510 venture capitalists investing in 11,895 portfolio companies from 1975 to 2003. They found individuals were more likely to collaborate with others who have similar characteristics and backgrounds.

For example, two venture capitalists with degrees from major universities were found to be 8.5 percent more likely to co-invest than individuals who don’t share that educational background.

The economists found the investment performance improved with the number of top school degree holders in the partnership. Having one increases the chance of the portfolio company selling shares to the public by 9 percent and having two increases the chance of success by 11 percent.

By contrast, performance is less impressive when people who share affinities work together. The economists found that the probability of a successful outcome decreased by 18 percent if two venture capitalists who previously worked at the same company partner up. The likelihood of success falls by 22 percent if two graduates from the same lower-ranked school link and there’s a 25 percent reduction in performance when people from the same ethnic group unite, they said.

“Collaborating for ability-based characteristics enhances investment performance while collaborating for affinity-based characteristics dramatically reduces investment returns,” the economists said. “Our conclusion is that, to paraphrase Ralph Waldo Emerson, you cannot afford to be stupid with old friends when you are venture capitalists co-investing together.”

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


The Good Business Issue
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus