Saturday, 28 May 2011

A quick look at Argentina after the default

I intended to write a post about Argentina for ages, but I never really got down to it. One aspect of the whole matter that I think is particularly interesting is the sectoral breakdown of activity before and after the country’s default, namely which sectors got the hardest hit after the default and which rose in importance. Argentina defaulted in early 2002.

source: United Nations

The chart above shows the main sectoral aggregations of economic activity as a % of Argentine’s GDP. The original figures are in USD terms so they might be affected by the peso’s fluctuations after the default and subsequent floating of the exchange rate (before the default the Peso was linked to the USD at a 1 for 1 parity).
A key takeaway from the chart is that activity in all non-tradable sectors (wholesale/retail trade, other activities, construction etc.) plummeted while tradable sectors rose in importance.
The “other activities” aggregate includes financial services, public administration, social and personal services, etc.
For Argentina the non-tradable sectors were overly large and the tradable sectors were “somewhat” smaller. Due to the inability to run current account deficits post-default, for the country to be able to resume imports of goods and services deemed as necessary or desired, the tradable sector had to export more, hence the aforementioned re-balancing (along with the shrinking of the domestic market which increased exporting’s prominence as a way out for businesses) .
Of course the current account deficits of Argentina were miniscule compared to the ones Greece has been running for decades now…

source: IMF

The shock in supply of goods in Argentina was said to be large due to disruptions in the importing business but imagine how large the shock for Greece will be given how large the country’s current account deficits are.
Furthermore, Greece’s need for re-balancing is much greater, since the tradable sector is ridiculously small and the non-tradable sector monstrously large.

source: United Nations

From where I’m sitting things doesn’t look good for Greece…

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