FUZZY SIMILARITY AND COUNTERFACTUALS IN THE ASSESSMENT OF DEFAULT RISK: THE EUROZONE CRISIS AND THE ARGENTINEAN SOLUTION

Abstract

(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONThe events that followed the 2008 financial crisis have shown that countries believed to be shielded against financial turmoil were much frailer than thought. Since then numerous voices pointed out the resemblance of the situation in the most challenged countries of the Eurozone with Argentina in 2001 [4][5][10][15a]. As it is well known, the convertibility of the Argentinean peso allowed the banks to carry dollar-nominated accounts, making their balance sheets susceptible to financial fragility at rapid exchange rate changes. While the latter were forbidden by law, the current account deficits and the increasing difficulties to pay back external obligations ended up forcing a default of the debt and a sharp and disordered devaluation of the currency. These events seemed, at the beginning, a source of endless mishaps but ended up (together with a rapid improvement of the international prices of Argentinean exports) creating the conditions for a fast rebound of the Argentinean economy [5] [9] [15a].It is no wonder then than a chorus of experts in various fields started recommending Greece (and eventually other EU members) to follow the Argentinean path [4] [5] [10] [14] [15a] [17] [18]. These arguments, based on rough analogies, deserve a closer analysis, which we intend to carry out in this paper. While this macroeconomic scenario has been analysed once and again in the macroeconomic literature (as well as by pundits and politicians), since the basis of comparison is a single case a strong justification in needed for making this assessment. Helmer and Rescher's ([13]) provide, fortunately, a sound foundation for such procedure. A counterfactual analysis based on the similarity of the two cases is the key. We focus here on such an exercise. To wit: are really the troubled euro-economies and 2001 Argentina so similar? And, if so, to what extent should be expect them to default on their debt and abandon the euro, as seen in the perspective of the 2001 devaluation of the peso? The answers to these questions require the formulation of an appropriate notion of similarity among economies and the exploration of means to infer future events out from analogies.The approach to be followed in this paper consists in applying Zadeh's ([25]) notion of fuzzy similarity to the comparison of the economic status of different nations. This formalization is intended to capture similarities among crisp objects. Nevertheless it is based on degrees of membership to sets of objects, namely those that satisfy some rather imprecisely defined (i.e. fuzzy) properties. While other approaches to similarity have been explored in the literature (e.g. [1] [2] [3] [8] [21] [24]) ours provides the right combination of soundness and simplicity required by the particular problem at hand. We find that 2001 Argentina and the troubled Eurozone countries belong to a common (fuzzy) equivalence class. From this we will draw the degree of possibility to be assigned to a devaluation and change of currency in the light of the events in Argentina a decade and a half ago.The plan of the paper is as follows. In section 2 we will provide a conventional account of the current economic situation in some European countries and 2001 Argentina. In section 3 we will discuss the epistemological justification for counterfactual analyses and the conditions under which they can be performed. In section 4 we introduce a version of fuzzy similarity and its application to the evaluation of future consequences in similar situations. In section 5 we apply it to the comparison of the aforementioned economies and draw conclusions for the Eurozone. Finally, section 6 concludes.2. CRISATVIA AND ARGENTINAThe pervasiveness of systemic risk and fragility in some Eurozone economies forces a comparison with the crises in emergent countries at the end of the 1990s and particularly with the end of the convertibility regime in Argentina. …