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Greece, inflation and devaluation lessons from Argentina

Stefano Fugazzi (ABC Economics) – What would happen to Greece in the – I think – very remote event of a temporary or prolonged departure from the Eurozone?  What would be the impact on the country’s economy, with particular reference to inflation and exchange rates? Advocates of the “Greece-to-leave-the-euro” usually refer to Argentina as a so-called success story. Hereafter we took the initiative to briefly report on the evolution of Argentinian economy in the aftermath of the collapse of the fixed parity between its peso and the United States Dollar in January 2002.

The exhibit below shows the evolution of the USD/ARS forex from 31 December 2001 to 31 December 2014. The reader will observe a spike in the USD/ARS exchange rate (i.e. a devaluation of the peso against the “greenback”) when the currency peg ended in early January 2002, peaking at 3.9 on 24 June 2002 (please refer to Note (1) in the graph), up from 1:1 (parity) on 31 December 2001.

arg1

Subsequently the exchange rate stabilised, with values in the 2.8-3.1 bracket for 5 years (May 2003-August 2008). However, the burst of the 2008 crisis and reoccurring rumours on the financial stability of Argentina caused the peso to progressively lose ground against the US dollar, with the USD/ARS forex hitting 4.0 in February 2011, 5.0 exactly a year later, 8.0 by the end of January 2014 and  9.1 by the end of 2014.

We can observe hyper-inflationary dynamics in the first 12 months after the end of the USD-peg; however consumer prices fell in the following two years before returning to 10% (the mean inflation rate for 2005-2013).

The educated reader will notice a correlation between the 2013-2014 rally in the USD/ARS exchange rate  (i.e. the peso devaluating against the Dollar) and a surge in Argentina’s inflation rate (23.9% at 2014 year-end) whilst all other macroeconomic data (see below) remained broadly consistent throughout the past decade (2005-2014).

arg2

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