Analysis – Argentine crisis survivors: Greece should take heed


Protests outside the palace, IMF warnings to cut spending, people in suits avoiding the mob, fear of a run on the banks, the spectre of default, a currency fixed to a much stronger economy: Greece, 2011, or Argentina, 2001?

“Que se vayan todos!” (They must all go!) was the slogan of the protesters forcing out the Argentine president who locked away their bank savings, triggering default and devaluation. “Thieves!” and “Leave us alone” Greeks yelled.

The parallels between the Greek crisis and Argentina’s collapse 10 years ago were not lost on Athens protesters last month when parliament voted through more cuts. They floated a balloon asking: “Yesterday, Argentina; Today, Greece; Tomorrow?”

That vote cleared the way for a second EU/IMF bailout for Greece that has pacified financial markets for the time being. But opinion is divided over what the future holds and whether Greece should be daunted or encouraged by Argentina’s example.

Some economists argue that Argentina’s default and exit from the peso’s one-to-one peg to the dollar — the “Convertibility” system lasting a decade — set the scene for sustained economic growth that reached 9.2 percent last year.

Others argue that because Argentina’s crisis was preceded by a decade of free-market reforms, and followed by a huge surge in world commodity prices benefiting its farm exports, it would be unwise for Greece to attempt to take the same fraught path.

Argentines watching from afar often say it is “just like 2001 but, unlike Greece, we were on our own.” This underlines the gap in their strategic significance: dollarised Argentina held no risk of contagion for the United States, but an uncontrolled crisis in Greece could spread to Spain and Italy.

In Argentina’s case, the buck stopped there, in more than one sense, and while bondholders around the world sued it for years over the default, there was no real contagion.

But policymakers and economists who were deeply involved in the Argentine crisis draw parallels that could help Greece find solutions and avoid some pitfalls.

Guillermo Nielsen, who as Argentine finance secretary led talks with creditors after the default and was later ambassador to Berlin, recalls “huge arguments with people in Germany who told me ‘we’re not going to restructure, we’re Europeans, not Argentine’ — as if one had a choice in the matter.”
“By not reacting quickly or studying the mistakes that were made in Argentina, they lost a lot of time,” he told Reuters.

Jose Luis Machinea was economy minister from 1999 until 2001, a period of deep recession that undermined faith in the currency system.
“I see lots of similarities, though many of the problems Argentina had are even more serious in the Greek case. Our debt was 50 or 55 pct of GDP but in Greece it’s 150 percent,” said Machinea, who is now a university professor in Buenos Aires.

From his own experience of imposing tough and ultimately fruitless cutbacks, Machinea concludes that the government in Athens will only convince its public to accept such savings “if the other side also makes sacrifices” — meaning creditors.

The latest Greek bailout foresees private sector creditors taking a 21 percent loss on their bond holdings.
“Without that component, when you just ask the people for more and more, the cutbacks just keep coming and they are never enough, because the recession eats it all up,” he told Reuters.

He left before the most calamitous moment of 2001 when his successor, Domingo Cavallo — arch-defender of Convertibility in his first period as minister from 1991-1996 — stopped a run on the banks with the “corralito” (enclosure). This stopped people withdrawing more than 250 pesos a week from their bank accounts.

The ensuing deadly riots forced President Fernando de la Rua to quit and his successor Adolfo Rodriguez Saa lasted a week — time enough to declare the world’s biggest sovereign default.

The next president, Eduardo Duhalde, freed the peso from its peg, leading to its depreciation by 300 percent in three months, and then “pesified” bank deposits and debts.

Some analysts believe Greece should follow the same path — by defaulting and leaving the euro zone so that the competitive advantages of a cheaper currency will help it recover strength.

Nobel-winning U.S. economist Paul Krugman says Argentina’s recovery suggests Greece should follow its example. Dean Baker of the Centre for Economic and Policy Research believes Greece cannot accept “never-ending demands for austerity” and Argentine “provides the model” for bringing back a domestic currency.
“Greece needs to return to competitiveness and what they lack is a mechanism for the euro to take a ‘leave of absence’,” agreed Guillermo Nielsen.

As an interim measure, Greece should consider the Argentine “quasi currencies” or scrip issued by the central and provincial administrations after the crisis to pay state employees and suppliers, which Nielsen managed to redeem in full in 2003.

Those survivors of the Argentine crisis who advise against a devaluation include Mario Blejer, who briefly ran the central bank after the default and later advised the Bank of England.

Blejer writes that if any country tries to quit the euro, there could be a run on the banks in “anticipation of forced pesification,” the same way that Argentines began fleeing the peso fearing devaluation a year before it eventually came.

Steve Hanke, economics professor at Johns Hopkins University in Baltimore, played a major role in setting up currency systems around the world from Argentina to Lithuania.

He believes Greece should have carried out a voluntary debt restructuring “on day one” and needs “huge internal devaluation” by reforming its taxes and privatising inefficient assets.
“If you want to wait 10 years to get your per capita income back up to where it was before the crisis then do what Argentina did: blow the thing up, default, have a huge devaluation,” Hanke told Reuters, saying that it took Argentina a decade to get per capita income (in dollars) even back to depressed 2001 levels.

Hanke and others say Argentina’s recovery boils down to external factors including, crucially, a commodities boom.
“Argentina recovered for three reasons: devaluation, debt restructuring — and soybeans,” said Nielsen, pointing out that soybean prices have shot up to around $500 a tonne from about $180 at the time of the Argentine crisis.
“But what will be the locomotive that gets Greece out of the crisis?” asked Nielsen. “That is not clear.”

Cavallo, whose association with the “corralito” makes him an unpopular figure in Argentina, like De la Rua and Carlos Menem, the president who brought in Convertibility, says the Greeks are wise to be wary of devaluing like Argentina, fearing a fall in real salaries and chronic inflation.

Prescribing instead privatisations and reforms like the ones he and Menem launched in the 1990s — which have been partially undone by later Peronist leaders — Cavallo said on his website: “The Greeks are quite rightly terrified that what happened in Argentina from 2002 on could happen to them.”