Can Greece learn the economic lessons Argentina missed?
- 28 June 2011
- From the section Business
As the financial crisis in Greece drags on, experts hunting for precedents have repeatedly referred to the country that last suffered a comparable economic fiasco: Argentina.
In the worst-case scenario, Argentina's recent past is Greece's future.
The peso collapse, massive default and subsequent social and political unrest that rocked Argentina in 2001-2 are being seen by many economists as an awful warning for the politicians in Athens and Brussels.
Even at first glance, Greece's woes have a lot in common with those of Argentina nearly a decade ago.
On the level of gut instinct - which is, after all, the way the markets generally work - the Greek crisis has the same slow-motion train-crash feel that characterised Argentina's slide into turmoil.
In Argentina's case, the government struggled to keep the economy on the rails, even though it had help from the International Monetary Fund, for most of 2000 and 2001, before President Fernando de la Rua was forced to resign.
His replacement, Adolfo Rodriguez Saa, lasted just a week in office. But before stepping down, he triggered a $102bn debt default which the country is still trying to remedy.
Ordinary Argentines suffered the consequences of the crisis. The unemployment rate hit 21.5% and did not return to single digits until the end of 2006.
If that era of turmoil in Argentina has anything to teach the world, it is debatable whether Argentina itself has, in fact, learned anything from the experience.
In Buenos Aires as in Athens, it is still popular to blame outsiders such as the IMF for the country's plight, without really admitting the extent to which its own behaviour contributed to the crisis.
And with Argentine President Cristina Fernandez de Kirchner running for a second term as president in elections on 23 October, the same short-term approach to the economy is very much in evidence.
Just as Greece fiddled its national statistics in order to be allowed to join the euro in the first place, Argentina's blatant falsification of its inflation data has been widely denounced by financial analysts.
Many observers have noted that Greece's problems can be properly resolved only by years of painful structural reforms, while doubting whether Greeks really have the stomach for such a solution.
In Argentina, too, any desire to tackle the economy's underlying structural problems vanished once the country returned to growth, heightening fears that its current boom will eventually prove to be unsustainable.
Aside from the protracted nature of Greece's suffering, there are other, deeper parallels between the two countries' predicaments.
For a start, they both locked themselves into a currency regime that gave them no flexibility.
Greece, of course, is in the eurozone, so its monetary policy is decided by the European Central Bank in Frankfurt.
In contrast, Argentina kept its own currency, the peso. But under the Law of Convertibility, passed in 1991 and not abandoned until January 2002, its value was fixed at parity with the US dollar.
That policy was the brainchild of Peronist President Carlos Menem's finance minister at the time, Domingo Cavallo, as a way of restoring the currency's credibility after years of rampant inflation.
Initially, it worked well - so well that it became an article of faith for the opposition Radical Party, too.
In the late 1990s, I interviewed the Radicals' Jose Luis Machinea, tipped for the finance portfolio once the party won the next election.
He was adamant that "convertibility" would be the cornerstone of his policy - and he kept his word when he got the job in December 1999.
But he lasted less than 15 months in office before resigning as the government's efforts to defend the currency peg led to unpopular spending cuts.
Argentina had let its public debt get out of control, as Greece has now - although Greece's position is far worse, with public debt now at 158% of GDP, as opposed to 62% of GDP in Argentina in 2001.
At the same time, the link to the dollar meant that it suffered from the ups and downs of the US economy, just as the eurozone imposes a one-size-fits-all straitjacket on its diverse economies that stops them devaluing or setting their own interest rates.
If Greece is to go down the route of Argentina, it will have to leave the euro and default on most of its debt.
This scarcely looks attractive, since Argentina is still being penalised for its own default. Although it has already struck deals with the majority of its creditors, it remains unable to borrow on world markets.
Argentina is currently in talks with the Paris Club group of lenders to settle the bulk of its outstanding debts, but there is little sign of progress.
Of course, Greece has those much higher debt levels than Argentina did - and it is less competitive in world markets.
And whereas there was little or no wider contagion from the Argentine default, a Greek exit from the euro would make matters worse for other countries on the euro-periphery, such as the Irish Republic and Portugal.
The Argentine and Greek economies, by the way, are broadly similar in size nowadays - the IMF's world ranking last year put them at number 27 and number 32 respectively.
But before its crisis, Argentina's was a whole lot bigger - in 1999, it was the 16th-largest. That's another reason for Greece to beware the siren voices that urge it to default.
Under the mattress
Argentina clearly has lessons to teach the eurozone. But the UK, too, should pay attention.
In the late 1990s, when convertibility was still working for Argentina, there was a feeling among the Buenos Aires elite that the country had genuinely changed and become a more responsible place.
In the days of hyperinflation, people had maintained the value of their savings by exchanging their local cash for dollars and hiding them somewhere in their homes.
The only bank that was trusted was the "colchon bank" - "colchon" being Spanish for mattress.
That habit briefly abated, but is now back again. Much as Britain never really eliminated boom and bust, so Argentina's essential nature remains unchanged.
And if you want evidence to back up the view attributed to Bank of England governor Sir Mervyn King before last year's UK general election - that the resulting government would have to take such unpopular economic measures that it would be out of power for a generation - look also to Argentina.
It might have been Mr Menem's Peronists that pegged the currency and ran up the debt, but the resulting crisis happened on the Radicals' watch - and it almost destroyed them as a political party.
So far, Greece's leaders seem unprepared for the destructive effect that the current crisis may have on their own political system. But unless they manage to muster a cross-party consensus for the government's five-year austerity package, the prospects look bleak.