Greece Is More Like Argentina Than Uruguay: Economist

Past voluntary debt reprofilings in Latin America have worked to varying degrees, but "soft" restructuring is not going to solve Greece's debt problems, according to Stuart Culverhouse, chief economist of frontier markets specialist Exotix.

Swimming pool in Greece
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Swimming pool in Greece

Parallels have been drawn between Greece's current dilemma and that of Uruguay, which underwent a voluntary debt exchange in May 2003 after its 2002 financial crisis left it with a public debt mountain and a cluster of debt maturities over 2003-2007.

The Uruguayan government extended the maturities on its debt without a reduction in coupons, restored debt sustainability and avoided default.

Greece, however, is not Uruguay, Culverhouse told

"The comparison is a tricky one. I think people have seen the fact that there was a maturity extension operation several years ago in a country with ostensibly similar public debt issues, and said well, it worked then, it must be able to work now. It's not so clear cut," he said.

"We're talking a much larger operation if Greece was to go through this process, and possibly a much more fragmented investor base, a more diverse banking sector. I don't think the parallels are strictly there, which means to us that it's going to be a much harder thing to try and pull off."

Uruguay had less debt and lower deficits than Greece when it entered its crisis, and much of the rise in its debt/GDP ratio was due to exchange rate depreciation, Culverhouse noted. Its exchange rate flexibility post-crisis also allowed its government to respond more effectively by restoring investor confidence and improve the country's competitiveness. Without leaving the euro, Greece would not have this flexibility.

Uruguay also had a relatively small debt reduction, compared to the considerable cut that Greece will need. The Latin American country also benefited from a stronger global and regional economic outlook and from a market perception that its problems were externally, rather than internally driven. Investors today are struggling to buy the argument that Greece's problems were anyone else's fault but its own.

Argentina's attempt at a debt extension in June 2001 is perhaps a better example of how Greece's reprofiling might play out, Culverhouse said. That voluntary debt exchange was only a temporary success, staving off default for six months.

"I don't think it's going to work in the sense that it's going to restore sustainability and solvency. It may buy a little bit more time, but I don't think that alters the underlying debt dynamics. It doesn't solve the debt/GDP ratio."

Deferral is "the only decision that policymakers are willing to consider," Culverhouse said. "We think they need to go further."

"(default) may be the inevitable consequence of an operation that has a significant debt reduction. I think it will mean that they will end up defaulting… within the next year or so."