16 Jun 2012

Greece: Don’t Cry For Me Argentina

Argentina may be able to teach Greece a thing or two about financial collapse after fighting back from its own 2001 economic meltdown. But is Greece ready to listen?

Is Argentina a model of to do or not to do? A decade ago, as Argentina slid into financial collapse, banks barricaded buildings behind sheet metal to keep protesters from breaking in to take back their life savings.

Angry crowds trapped President Fernando de la Rua in the Pink Palace on 21 December 2001, forcing him to flee by rooftop helicopter. Another politician resigned on television from his sitting room because he feared being lynched.

Five presidents assumed power in the next two weeks until 6 January when Eduardo Duhalde, the interim president, declared the currency devaluation. The economy went into free fall.

“People sold everything and moved to Spain, and took jobs doing anything, because they felt this country had no hope,” said Daniel Kerner, an analyst with Eurasia Group risk consultancy.

Greece, which heads to the polls for a second time in months to elect a government, may want to take note. Argentina’s strife may provide lessons for Europeans and Greece as the cradle of democracy teeters on bankruptcy, alongside Spain, Portugal, and Ireland while the rest of Europe holds its breath.

“The European banking system is paralysed,” Nicolas Veron, a senior fellow at Brussels Bruegel think tank, said. “So many banks hold massive amounts of Spanish and Italian government bonds that are losing value. We no longer have a functioning interbank (lending) market in the eurozone.”

Fast-forward a decade. Argentina is still struggling to get back into the global credit market, but the economy has risen more than 8 per cent a year since 2003. Car exports to Brazil have resumed. To

Strikes and looting

Argentina experienced eight general strikes in 2001, shops were looted and roads blocked. It was an ugly low after a failed attempt to peg the peso to the US dollar led Argentina to a default on $100bn owed and devalue its currency.

Residents lined up outside European embassies hoping to emigrate.

Fast-forward a decade. Argentina is still struggling to get back into the global credit market, but the economy has risen more than 8 per cent a year since 2003. Car exports to Brazil have resumed. Tourism is on the rise in the cities and countryside (pictured right).

Marco Aurelio García, a policy adviser in Brazil, told a political meeting recently that the foreign debt decisions taken by Argentina in 2001 and 2002 could pull Europe out if its crisis.

“The Argentine model of radical resolution of the crisis is the only solution for countries like Greece”, he added, pointing out the economic growth Argentina underwent following its debt swap.

How did they do it?

By 2003 Néstor Kirchner succeeded Mr Duhalde and implemented a new economic model – the same model his wife, Argentina’s current president, Cristina Fernández de Kirchner, uses today.

The strategy was based on using the devalued currency to increase exports and decrease imports. He maintained trade surpluses to finance the government and pay debt. Luckily for Argentina, a large producer of soybean, there was an increase in the price from $200 in 2002 to almost $500 a ton in 2012.

Greece cannot export its way out of its debts, but it can benefit by examining Argentina’s debt restructuring to avoid repeating its mistakes.

Lesson number 1: The IMF always gets paid

Argentina’s debt was restructured in 2005 when the economy was recovering. Foreigners including pension had to take haircuts on bonds that cost them two-thirds of their investments.

For Greece, so far, so good. Greece notoriously defaulted in the largest sovereign default in history in March 2012, which allowed Greece to erase 100bn euros off of debts of almost 350bn euros.

But that kind of deal only works with commercial creditors who are further down the chain than those who get paid first in an insolvency. Argentina still had to pay the International Monetary Fund $9.8bn in 2006 – the full amount – and has not borrowed from the IMF since, so it did not have to impose IMF-demanded austerity measures and state spending cutbacks.

Argentina also largely subsidised energy and some food to keep the public happy, but it is the commodity price rise that gave the country a comfortable cushion.

Lesson Number 2: Settle with other investors

If Greece – and for that matter Argentina – want to borrow on the international markets in the future, they will have to settle their outstanding debts.

Argentina still owes $9bn to the so-called “Paris Club”, 19 countries with large economies but hopes to settle that debt by the end of 2012 and it is embroiled in court action with others who refused to take less money than they were owed on bonds.

Greece, with its heavy reliance on services and tourism may be a more difficult project than Argentina to fight and push its way back to stability, however. Greece perennially runs a trade deficit, while Argentina runs a trade surplus.

And Greece’s debts are sizable. Argentina had a fiscal deficit of 3.2 per cent of GDP when it defaulted. Greece’s deficit is estimated at 10.5 percent of GDP.

The solution?

Is the common currency’s Greece’s biggest problem, however? Without a euro exit, Greece cannot devalue its currency to the drachma, which has helped Argentina’s recovery making exports cheap.

“The big problem for Greece is that they have a strong currency, much stronger in relation to their productivity,” said Eric Ritondale, a senior economist at Econviews consultants.