Friday, 12 May 2017

How to bring on Hyperinflation: the Argentine experience as a cautionary tale for Greece

We have lately seen a lot of comparisons between the current Greek depression and various sudden stop episodes in different countries. All those pieces though have missed the case most apt for such a comparison. The Latin American Debt Crisis of the 80s. Out of all the Latin American countries that went through extremely hard times back then, I'll focus on Argentina due to greater data availability. I won't go into comparing the performance of the two economies in this post but I'll focus instead on the occurrence of hyperinflation towards the end of the decade and the causes for that occurrence.

In both cases there was a cluster of sudden stop episodes encapsulating the whole region (in Argentina's case Latin America, in Greece's case the European periphery), making the countries' access to capital markets rather pricey if not outright impossible. 

In Argentina's case, which had what many Grexit-advocates prescribe as a way for Greece to overcome its plight, i.e. the ability to print money at will, the lack of access to capital markets was plugged the usual way. By putting the printing presses to work.

The next chart makes rather obvious that when government revenues dropped, inflation in Argentina spiked something that implies a jump in seignorage. It is worth noting that throughout the 80s inflation dropped below three-digits only once, in 1986 (during the Austral plan), when it stood at ~90%.

source: IMF,

If we zoom in on the period right before and after the hyperinflation episode, it becomes crystal clear that hyperinflation was preceded by a momentous surge in monetary financing for the government by Banco Central de la Republica Argentina, the country's central bank.

source: BCRA,

Given that many Grexit proponents envisage that the country can e.g. raise its pension spending by printing money, the Argentine experience becomes rather relevant for Greece as well. Moreover, in case of a messy default and unilateral Grexit wouldn't tax revenues drop significantly? How would government finance the resultant deficit? Money-printing again seems to be the path of least resistance. If we add international trade disruptions and the subsequent shortages in the above mix, a "(much) more money chasing much fewer goods environment" emerges.

Many outsiders dismiss the possibility of hyperinflation in case of a messy Grexit as too far-fetched and unlikely. I, on the other hand, think that takes like this are overly optimistic and tend to ignore how a rather large part of the Greek political systems thinks and acts. I would advise them to take a look at the cluster of hyperinflationary episodes in Latin America during the 80s which came on as a result of the cluster of sudden stop incidents in the region. Suddenly, the possibility of hyperinflation making an appearance  in case of a messy Grexit doesn't seem that low, does it?