The Euro sovereign debt crisis finally gets interesting!

After several years of this slow-motion train wreck starting with the saga of Greece and its endless spiral to the bottom, the Spanish and Italian debt crisis is finally shaking things up in Eurozone politics. Greece with its leadership was an easy pushover. Spain and especially Italy as larger countries with more political and debtor leverage as well as better political leadership are a more difficult match for the EU elite. The most painful duet is Monti and Draghi: Draghi pushing for non-conventional monetary policy and Monti, keeping Frau Merkel up until the wee hours of the night for a banking union and debt mutualization.

The growing economic divergences from the Eurozone policy makers’ self-inflicted debt deflation coupled with their dubious techniques of "internal devaluation” is taking its economic and social toll. The Europhiles have created macabre Great Depression-level GDP collapses in places like Greece with appalling levels of unemployment and private sector bankruptcies. Whilst you hardly hear a peep from the Greek political elite, who continue to be ardent believers in the confidence fairy of Eurozone economics, this mess is causing the political leadership in Spain and Italy to balk and resist a similar fate, seeing what is in store for them where the EU has left scorched earth.

Private investors remain highly skeptical, looking at all this carnage.  Bill Gross of PIMCO recently wrote an interesting piece in the Financial Times, where he reveals the obvious: EU policy makers are looking for private sector money to reflate and cover their growing mountain of bad debt, but against a dismal track record where they have not hesitated repeatedly to bilk investors and leave them with significant losses to promote their political agenda.

Ambrose Evans-Pritchard, the business editor of the Telegraph has been very astute early on to see that Northern and Southern Europe are not compatible in a common currency zone. The crisis is accelerating the structural divergences and this is leading to growing political fractures.

Italy’s Silvio Berlusconi has already threatened the Eurozone that either Germany must leave or Italy will depart with a growing coalition of industrialists, who see the solid advantages of Euro exit for Italy as confirmed in a recent Merrill Lynch study. Mario Monti on the other side of the spectrum wants to keep Italy in the Euro project, is trying to muscle Germany to accede to debt mutualization and more flexible monetization policies by the ECB to deal with the debt overhang.

Clearly, as economic conditions deteriorate, the die is cast: either the Eurozone needs substantial structural changes so North and South can co-exist or there must be an amicable divorce. No political union of diverse peoples has every taken place without mass repression.

The Soviet Union that the predecessors of the present generation of Europhiles adored as a model of human progress in the 1930’s is a good example. The Austro-Hungarian Empire prior World War 1 with its efforts of benevolent reforms echoes the German domination today in the EU and policies towards the EU Periphery. By its nature, forced political integration and dissolution of the nation state means the end of the right of self-determination for diverse peoples and forced collectivization.

Indeed today’s utopia of a European super state with a common currency has an eerie resemblance to the Communist utopia of the Comintern, otherwise known as the 3rd International. The European Union operates by unelected officials, who currently dictate the majority of laws of its members and drive this sovereign debt crisis that is deepening in the Periphery and moving to the Eurozone Core. 

Whilst it not hard to understand how the European Left has embraced this concept, it is surprising how easily the European Right has capitulated to this forced collectivization and abandonment of the nation state together with the abrogation of civil and economic liberties as well as the right of national self-determination.  Their stand reminds one of the Girondists and let's not forget the chilling fate that they met in their time.

Greece is an astonishing case where the conservative New Democracy Party is leading a coalition government with two parties of the Left, embracing economic programs that are impoverishing large sectors of the population, especially in the private sector.  Most European parties of the Right behave in a similar ambivalent fashion.  Consider the present Spanish government in its current dilemma.  Even the UK Tories continue naively to believe that somehow they can build a firewall from this growing storm by promises of vague renegotiation of their EU membership.

Already the Eurozone has shown an iron fist of political and economic repression, making debt slaves of its weaker members like Greece, Ireland and Portugal; drastically reducing economic freedom and national sovereignty. Confronted with a similar fate, the larger Eurozone members of the Periphery are beginning to realize that these issues have real political substance. Remaining in the Eurozone, accepting the loss of national sovereignty, civil liberties and economic freedom is a question of balancing costs and benefits of Eurozone membership, something that was always taboo in the past.

If there is a break up, the costs would be different in terms of who is the first to leave. If the Germans leave and revalue, the costs will be less for the South. The larger PIGS like Spain and Italy are beginning to realize that they do not have much to lose, taking aggressive stands with the Germans.

On the other hand, the Germans for the first time now begin to feel Eurozone malaise and the burden of the costs. Debt mutualization will certain result in a credit downgrade, having to carry the burden of the over indebted South. Already Germany has been put on negative watch list. Monetization and non-conventional monetary policy would market the end of a comfortable system where the ECB is in Frankfurt and under rules that have made it a Bundesbank clone accommodating German needs, until Mr Draghi has begun to shake things up.

Leaving the Euro, the Germans would be forced to revalue, losing their comfortable advantage in exports and to revise their policies. They would be compelled to recapitalize their banks for the sovereign loan losses of the South. Long term that might be preferable than the present course of endless bailout loans to the South and taking on endless liabilities to carry a failed and dysfunctional currency zone, but few in German political elite are eager for this bitter pill to be swallowed up front.

Meanwhile, the Greeks live in an Alice in Wonderland state where the political elite still clings to the Eurozone concept even as a colony with limited sovereignty, political and economic freedom. Ultimately their outcome in the Eurozone as well as the fate of the Eurozone itself is not in their hands, but most of the Greek political elite – at least in their mindless public statements - seem hardly cognizant the major battles that are raging outside of Greece.

Is Box Ships latest purchase charter back deal with Overseas Orient really as rosy as claimed?

Michael Bodourglou’s Box Ships (TEU) has been a considerable reprieve from current woes of his bulk carrier business Paragon (PRGN), now a penny stock struggling with sagging profits, charter party defaults and loan covenant breaches from declining hull values. By contrast, Box Ships has seen its revenues double from last year and recently had a successful fund raiser.

We have expressed in the past our reservations on Bodouroglou’s diversification play because we see it as a pure asset and market cyclical play without any inherent competitive advantage. Containerships are attractive because they are very cheap. Charter-free 15-year old containerships are going for scrap value, probably the cheapest shipping assets of any sector of the marine market. The vessels require charters from major liner companies, who have had their own problems with stagnant box rates, price wars for market share and investment in ever large tonnage to lower unit costs and defend operating margins.

The Overseas Orient deal is instructive. It is a purchase-charter back transaction from Orient Overseas (OOIL), which is a solid liner operator concentrating on inter Asia, Australia and trans-Pacific container routes and limited exposure on the currently problematic Asia Europe head haul route suffering from the Eurozone’s self-inflicted recession and debt deflation woes. The two 5.344 TEU vessels acquired by Box Ships are built 1995/ 1996.

Whilst charter free box ships of similar age are valued at scrap levels, Box Ships is paying the handsome price of US$ 62,3 million for these two aging units because OOIL will charter back the vessels at rates of US$ 26.800 per day for three years. Nominally assuming continuation of these rate levels on a five-year basis, this business brings returns on equity in the order of 16% per annum, which is very good performance in these difficult markets. After administrative expenses (namely the sizeable vessel management fees to AllSeas Maritime - Bodouroglou's privately held management company) the actual discounted cash flow returns to investors would be somewhat lower, but still this outshines returns on dry bulk and tanker business presently.

The issue is whether these rate levels are sustainable on renewal in three years’ time. There is as well as the matter of potential impairment charges on vessel values on a charter-free basis. So far the impressive revenue increases in Box Ships are mainly because Bodouroglou has been aggressively buying vessels and expanding the fleet. Yet the Box Ship share price has been steadily declining, initially around the US$ 10-11 level and now trading at the US$ 6-7 range.

Like all shipping transactions, these moves are a wager in hopes that the markets will turn around favorably and the cyclicality will boost returns. Bodouroglou could be well be correct in his investment timing.  Certainly he is getting plenty of banking and investor support in tough capital market conditions.

On the other hand there is tail risk here. In an expansion phase of a start-up venture like this, you double the number of vessels and get twice the revenue but does that is not the same as doubling your revenue on your existing fleet earning twice the freight income over the same expenses. Time will tell whether this strategy works out or Box Ships will disappoint and underperform expectations.

OSG in the doldrums: Is Morten Arntzen really one of the worst CEO’s in any industry?

Overseas Shipholding Group (OSG) is a blue chip tanker company that is currently in crisis with 13 quarters of operating losses, plummeting share value, rating downgrades (CCC+) and ominously its unsecured bond debt trading far below nominal value. Morten Arntzen claimed in the recent 2nd quarter earnings conference that OSG defensively drew to the maximum its current US$ 1,5 billion liquidity facility. With current market fixation on this facility expiring in February next year to be replaced by a smaller US$ 900 million facility, Arntzen did not provide much comfort to investors. To add insult to injury, Motley Fool named him one of the worst CEO's for the dismal stock performance and sizeable investor losses over the past year.

OSG is one of the oldest US tanker listings. It was founded back in 1948 by the Recanati family and listed in the US stock exchange in 1973. The Recanati are American Israeli with origin from Italy where they took their family name. Two of the Recanati family remain on the Board of Directors: Ariel and Oudi Recanati. Aside from shipping the family has a long tradition in banking and finance, having founded the Israel Discount Bank.

Morten Arntzen became CEO in 2004, coming from a banking background in New York. He ran the global transportation group for Chase Manhattan and Chemical Bank. Then he served as CEO for American Marine Advisers, a boutique NY marine merchant bank group with close associations with OSG and the Recanati family. Arntzen and the OSG finance director, Miles Itkin are mature executives both getting on in age and this is probably the first time that they ever been in an underdog crisis situation. Their strategy so far seems to have been to ride out the storm, hoping for a market improvement rather than making any serious sacrifices. At time goes on without market improvement, OSG’s alternatives get more costly and unpleasant so it is a difficult wager.

On the other hand, with over US$ 2 billion in debt, OSG has considerable debtor leverage. Given lenders accommodative stand towards lame duck shipping companies like Eagle Bulk and Berlian Laju Tankers, a “blue-chip” lame duck like OSG should merit equal or better treatment. This may be a fact that Arntzen is playing strongly behind the scenes.

OSG compared to peer tanker operators was slow to diversify into higher growth alternative marine investments like LNG or the offshore sector with better profit margins. To his credit, Arntzen succeeded early on as CEO in a merger with Stelmar that allowed the group a sizeable position in the product tanker sector in addition to their large fleet in crude oil. OSG’s investments in LNG and offshore have been timid and very conservative. In both cases, they opted for joint ventures and their position is relatively small. In fact, OSG has staked a lot in the US domestic tanker market, which until recently was making losses and limited in prospects.

Under US cabotage, the market is sort of an oligopoly with a limited number of operators, but several of them barely eking out an existence struggling with Chapter 11 reorganization. Lately with the Motiva Refinery project in Houston and US shale oil developments, the US domestic market has started to pick up, but Motiva is now shut down due construction problems.

OSG is counting on substantial MARAD Title 11 money for their US fleet that has been delayed. This subsidized loan money cannot be commingled in their overseas operation, but it is a very valuable resource in an exceeding difficult credit market conditions. Indeed, MARAD created recently some stir by its rejection of rival American Petroleum Tankers' (APT) application for Title 11 loan guarantees despite the company backing from Blackstone.  With the difficult conditions in the OSG international fleet, however, the profit from the US flag operation is unlikely to compensate and cover for the losses even with improved rates.

There is a lot of optimism for a turnaround in the product tanker sector. OSG is concentrated mainly in the MR size with focus on trans-Atlantic trades, but this sector has underperformed expectations. In the end, if new refinery projects come on stream and there is an increase in tonnage miles, it is possible that the LR size will benefit more than the smaller vessels.  Both Blackstone and the Prime/ Perella Weinberg Partners are concentrating on these larger units.  So is Scorpio Tankers, a financially much healthier company than OSG.

Otherwise, OSG share price currently around US$ 5 is not an attractive level to raise fresh equity and this would likely entail substantial share dilution in current Wall Street conditions. A bond issue would be expensive with OSG’s credit downgrade and require security given the current discount on its unsecured bond debt. OSG could sell and lease- back some of their unencumbered units, but this will be very expensive and the lease payments will weight on their cash flow and liquidity. Finally OSG could sell out its share in its LNG and FSO joint ventures.

Is it any surprise that Arntzen stresses over and over again that the tanker markets have reached their floor? He could be correct and in fact OSG 1st quarter results gave some comfort in this direction, but losses widened in the 2nd quarter.

Undoubtedly, it would be a big blow for Arntzen and Itken with their stature and age to be compelled to actual sacrifices, should tanker markets continue in the doldrums and OSG liquidity dries out. I believe, nevertheless, that OSG still has substantial support from its lenders, who will bend over backwards to keep them afloat until better days come.

Whether it is a profitable to own OSC common stock or take a position in its unsecured debt right now is another story. This depends on how quickly one expects a global turnaround in shipping markets. If freight markets remain at present levels into 2013, OSG will face some stressful times.

Banks distorting vessel values by keeping zombie shipping companies on life support, possibly delaying market recovery

According to Scorpio’s Robert Bugbee, bank deals like the recent Royal Bank of Scotland (RBS) equity for debt swap keeping their lame duck client Eagle Bulk (EGLE) on life support may actually be prolonging any meaningful market recovery. Instead of fleet renewal with this second hand tonnage moving to financially healthier and more efficient operators, this may encourage another round of speculative ordering for ‘econ-type’ tonnage financed on favorable terms by Asian banks to promote vessel exports and delay any recovery in rates for another two years.

“The problem is that the banks cannot afford to take write downs and private equity provides no better solution than the present operators,” Bugbee said. This keeps asset prices artificially high in markets where underlying cash flow from operations simply does not support these price levels. “This is combined with little available credit to buy second-hand tonnage and relatively low pricing for more efficient newbuildings, which will deliver at a later date and thereby avoid the present weak market. And these may have access to Asian finance.” Bugbee’s conclusion: “The result is that it’s probable that — on a ‘relative-return’ basis — fresh industry equity will continue to order newbuildings, thus lengthening the recovery process.”

What is ominous presently is the Chinese slowdown in growth rates, falling steel production and lower scrap prices. This may impact negatively vessel values. Not only will there be more fuel efficient designs, but replacement cost will fall.

Generally, commodities prices are soft and falling. This does not bode well for freight rates and cargo volume.

The stronger healthier shipping companies may adopt a similar strategy to some of the large liner companies like Maersk where they look to move into new technologically advanced tonnage that allows them to operate at lower cost than their beleaguered and financially-stretched competitors in a war of attrition. In this manner, they keep and expand their market share maintaining their earnings margins by efficiency and low financial cost, letting their competitors slowly bleed to death as they are slowly marginalized under their crushing debt stock and heavy financial expense in a prolonged weak freight market.

The only thing that could turn around this downward spiral is increased demand. Indeed so far, demand has been relatively firm as opposed to the shipping crisis of the 1980’s and the main issue is over-ordering. The wager in RBS lame duck support deals like Eagle restructuring is a speedy market recovery than brings up asset prices and improves cashflow.

Asset inflation has been a driving force in the shipping industry for many years now along with the Chinese double digit growth story. Should this environment change structurally, the industry (and its bankers) would be open to some severe readjustment shocks.

Eagle Bulk in trend-setting equity for debt exchange

After the TORM restructuring earlier this year, we now see another “equity for debt” exchange deal between Royal Bank of Scotland (RBS) and its beleaguered client, Eagle Bulk Shipping (EGLE).  RBS takes warrants for conversion into a 19.99% stake in EGLE.  To reduce the effects of dilution on shareholders, only one third of the shares can be cashed immediately.  There are share price triggers of US$ 10 and 12 per share for the cash out of the remaining shares in two tranches.  This sort of deal sets a new precedent for the shipping industry to keep weak companies alive a significant runway for a market recovery.

EGLE is carrying a crushing US$ 1.2 billion debt load, which was the result of massive block deal to expand its fleet at the peak of the boom cycle. As many shipping companies prior the 2008 financial crisis, EGLE preferred to expand its fleet by paying a premium to a private shipping company for a package deal rather than generating directly its own business for added value. The deal resulted in higher term debt leverage. Then with deteriorating market conditions, the company faced declining hull values and asset impairment charges as well as loan covenant violations as vessel values dropped below hull coverage ratios. The last two years, EGLE has been plagued with charter party defaults, declining revenues, growing operating losses. It is a highly leveraged player at the wrong time and place of the cycle.

This year, EGLE has seen considerable press about protracted negotiations with its senior lenders. Recently, EGLE and RBS settled a dispute over defaults to the huge loan and won a repayment holiday into 2015. The bank also offered up a new facility to the tune of US$ 20 million. An integral part of the deal was that the RBS would take a substantial equity share in the company as detailed above.

Doug Mavrinac of Jefferies was reportedly ebullient about the deal :

“Given that EGLE shares are effectively a call option at current levels, we believe the agreement is very attractive as it significantly lengthens the runway time for the market to improve and removes bankruptcy risk over the medium term,” he added:

“We also believe the move has positive implications for other large dry bulk shipowners regarding the banks' willingness to work through debt issues.”

Whilst I would agree that this deal sets a useful precedent for other troubled owners, I am not so sure that it is as beneficial to shareholders as he describes. I find this a bit like having your cake and eating it, too.

Inevitably, no one is going to come out whole in this unless the dry bulk markets improve, the company becomes profitable again, debt is paid down and vessel values rise. The Chinese growth cycle in infrastructure investment seems to be at an end. There are far too many ships. Scrap and steel prices are falling. There is a potential issue about new ship designs with lower fuel consumption.

EGLE remains badly exposed due to bad investment decisions of the past. Not only has management failed in delivering value to shareholders, but there have also been concerns about continued high remuneration levels despite the poor results. Added to this, the lenders now have an equity share in the upside, which means less to other common shareholders.

With Supramax rate expectations of US$11,000 per day on average the outlook still looks challenging. Prior this restructuring agreement, even market improvement expectations of US$ 13,000 perday for spot earnings in 2013 were not sufficient to service the crushing US$ 108 million debt maturities falling due.

So is EGLE an attractive company to buy as opposed to invest in peer dry bulk companies with better management performance, market position, lower leverage and healthier financial results?  Probably not!

EGLE is going to have to prove itself to be credible again.  This will take time and luck.

Pain in Spain and new elections in Greece: Investors are in a panic

Doubling up on failed policies in the EU is leading to the specter of massive and costly defaults of  hapless Eurozone members. As EU policy makers keep increasing the cost of abandoning the Euro to prevent Eurozone governments from willingly “misbehaving” and abandoning the euro, they ignore the accelerating amount of damage to the country and its creditors if things fail and social turmoil leads to this outcome. This is really spooking the markets and investors, who are withdrawing from the Eurozone.

Greece will inevitably be forced back to its national currency. The Greek public debt will have to be restructured with deep haircuts. The PSI+ is a dead letter. The really big issue will be the EU public debt to Greece, which needs to be written off in large percentages and the political fall-out thereafter in the lender countries for these “pretend and extend” follies.

In effect, the Euro is a greater Deutschemark zone. It never met the Mundell optimal conditions for a proper currency zone. The Germans have used this to promote a mercantilist export machine based on internal wage restraint and financial repression. This generates for them nice surpluses whereas the other hapless EZ members face growing deficits. The deficit countries have been pushed into massive increase of public debt to cover the growing trade balance deficits to avoid massive unemployment. EU policy makers and political elite knew that the system was defective, but they counted on using any crisis to promote forced political integration. They did not count on how difficult this would be under circumstances of deep economic recession and political stress.

The Euro works as a gold standard where the brunt of adjustment falls on the deficit countries. The only means to readjust is mass wage, salary and pension cuts, so this causes enormous social unrest from the severe deflation. The deflation makes the debt burden significantly worse, leading to spectacular drops in GDP and growing risk of huge and unmanageable debt defaults. Politically, the elite in the EU and Greece have lost legitimacy.

So in Greece, there is fragmentation of the political system. The whole basis of the 3rd Greek Republic is in question. There is a vacuum of political leadership. Greece is basically a poor country, living on a borrowed currency under colonial status within the EU. The two major contenders in this election are the “conservative” New Democracy party calling for Greece to “stay” in the Eurozone at any price and the Leftist SYRIZA declaring the IMF/ EZ/ ECB memorandum signed earlier this year a dead letter open for renegotiation. ND is basically living in the past, hoping to put “Humpty-Dumpty” together again with the EU and Eurozone. By chasing the impossible, refusing to admit insolvency and the impossibility of remaining in the Euro economic strait jacket; they are courting the worst possible outcome of disorderly default.

SYRIZA is the poster child of the last 30 years in Greece on Eurozone dependency as a welfare ward. They have discovered debtor’s leverage and challenge the EZ to continue the transfer money without the Memorandum austerity conditions. This puts the dilemma back on the EZ. If the EZ elite want Greece to stay in the Eurozone, effectively they have to convert their bailout loans to transfer money, something that the IMF has already been timidly suggesting in their latest debt sustainability reports. SYRIZA is forcing the issue that ND wants to avoid in direct confrontation with the EZ Core.

Neither party has any plan for Greece to stand on its own two feet, develop a proper productive base, etc. Greece is like a third or fourth generation family living on welfare entitlements. The Greek people are very ill prepared for the chaos that is confronting them.

The contagion issue of Greece leaving the Eurozone is probably overblown for political consumption but it difficult to see how the EU has enough resources to hold the Eurozone together with all the debt pyramiding to cover up the trade imbalances, especially falling into ever deeper recession. The current turmoil in Spain regarding Bankia and the failed attempt of the Spanish government to force the ECB to undertake its recapitalization to avoid losing sovereignty in another EU bailout program is illustrative of the challenges.

The EU elite suffer from a siege mentality. They have staked their political careers on the Euro project. If it fails, they are in disgrace and discredit and this reflected in an increasingly angry and desperate electorate whenever national elections are held. This highly problematic currency zone is failing and any attempt to manage the risks and minimize the damages falls on deaf ears in Brussels.

Pierpaolo Barbieri in the WSJ misstates Nouriel Roubini and fails to comprehend what went wrong in Argentina and is going wrong in Europe

This article makes a poignant plea for the Eurozone as a “worthy” project and supports the disastrous Argentina experiment to peg the Peso to the US dollar.  Whilst the writer makes some good points about the present populist regime in Argentina and recent expropriation of YPF, the Argentine oil company controlled by Spain's Repsol; he cannot seem to get it together on the politics and economics that led Argentina to collapse nor what is happening in the Eurozone.

Barbieri first puts his foot in his mouth when he accuses Nouriel Roubini of “making Argentina a model for Greece.” What he seems to mean is Greece leaving the Eurozone. I doubt that he has read seriously anything that Roubini has written on Greece. He does not appear to understand why Argentina collapsed and how this has affected the thinking of those like MIT’s Simon Johnson, who were involved personally at the IMF in this debacle.

Both Nouriel and Simon have been urging Greece and the E.U. to take measures to avoid economic collapse and disorderly debt default. Roubini has been calling for a consensual divorce from the Eurozone with serious debt restructuring. He even calls for measures to avoid a devaluation overshoot.

Barbieri, like many Greek commentators, makes the specious argument that the peso-dollar peg and single currency union is a necessary agent for structural reforms. In fact, linking a weak economy to a hard currency was essentially a political gimmick that has had disastrous results.

Both countries have suffered from corrupt populist regimes centered on charismatic personality cults. These leaders led them to economic ruin: Argentina has the Peron legacy and Peronistas, Greece has the Papandreou legacy and PASOK – an entrenched, rapacious and highly corrupt political elite.

In Greece, the purpose of Eurozone entry was to promote this populist and corrupt regime, not to build a sound economy. Even today, the political elite in Greece have no scruples about putting the general Greek population into abject poverty if it means preserving their privileges. Barbieri is a professor of government at Harvard. His inability to recognize the political and economic dimensions of these situations and how difficult structural changes are in such an environment is inexcusable.

In fact, Barbieri has got matters upside down: there no sense for a country moving to hard money unless structural reforms are already in place. He clearly does not understand the inherent dangers in artificially locking into a hard foreign currency, as the Argentine and Greek political elite did, for lower interest rates to whitewash a weak economy. He doesn’t seem to realize how mispriced credit can lead to destabilizing asset bubbles and crippling over indebtedness in such cases.

He claims spuriously that Argentina and Greece achieved “hard-won low interest rates.” In fact, the low interest rates were never earned, rather they were 'borrowed” as credit enhancement from the currency peg! There was huge resistance to structural reforms in these countries. The decoupling between actual credit risks and underlying economic fundamentals proved lethal. The borrowing and spending binge in these two countries, unleashed by this artificial hard currency link, eventually crashed and degenerated into sky-high unemployment, widespread poverty and credit lines from the International Monetary Fund.

At this point, Barbieri accuses the Argentine politicians of clinging “to an overvalued exchange rate” in the face of chronic deficits, capital flight and deepening recession. Well, this was the poison fruit of the currency peg. Greece is in the same unenviable position in the Eurozone.

As for his “harder, productivity-enhancing reforms like decreasing bureaucracy or improving labor-market dynamism,” this would take many years to achieve and would be a challenge even in a normal Greek or Argentine political climate. It would never be feasible in a deep recession with the ensuing social and economic chaos.

The sad truth is that countries with the political culture of Greece and Argentina require a soft currency for survival. Forcing change by currency pegs or currency zone memberships leads to insurmountable imbalances that degenerate into major credit defaults.