Greece v Argentina: Who wins on penalties?

By Robert Plummer
Business reporter, BBC News


Anyone examining the precedents for the Greek financial crisis might well be amused by the draw for next month's football World Cup matches.

Image caption,
Greece's players celebrated after qualifying for the 2010 World Cup

For, as fate would have it, Greece's foes in Group B include 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 2001-2002 are being seen by many economists as an awful warning for the politicians in Athens and Brussels.

As far as football is concerned, the two sides will meet on 22 June. For both teams, it will be their third and final group match.

But the day of decision for the Greek economy will come sooner, on 19 May, when the country needs to stave off default by honouring bonds worth 8.5bn euros ($11.2bn; £7.3bn).

The EU and the IMF have agreed to lend Greece 110bn euros over three years to bail out its stricken economy.

But the deal still needs to clear hurdles in the French and German legislatures, while Greece itself must implement severe budget cuts in return for the money.

And, of course, the Greek drama does not end there. The road to recovery will be long and painful, as the country struggles to regain lost competitiveness and get its costs into line with major EU economies.

In slow motion

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-wreck feel that characterised Argentina's slide into turmoil.

Image caption,
Street protests brought down Argentina's government in 2001

In Argentina's case, the government struggled to keep the economy on the rails 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.

Argentina's current Finance Minister, Amado Boudou, is hoping that its latest debt swap offer, covering $18.3bn of defaulted bonds, will help rebuild relations with world credit markets.

Since the government is currently unable to borrow on those markets, it has been raiding the central bank's reserves in order to pay off debt - a policy that prompted its boss, Martin Redrado, to resign in January after a bitter public row with President Cristina Fernandez de Kirchner.

Currency crunch

That's the kind of disarray that Greece can look forward to unless it manages to get its fiscal house in order.

But 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.

Image caption,
Mr Machinea failed to turn Argentina's economy around

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. 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.

Lessons to learn

If Greece is to go down the route of Argentina, it will have to leave the euro and default on most of its debt.

Since Argentina is still being penalised for that, in terms of its pariah financial status, it scarcely looks attractive.

Worse still, Greece has much higher debt levels than Argentina did and is less competitive in world markets.

Image caption,
Greece's new austerity measures have led to further protests

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 recently attributed to Bank of England governor Mervyn King - that the winning party in the UK's general election will have to take such unpopular economic measures that it will 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.

This summer, football will provide an exciting diversion for Argentina, Greece and England. But when economic reality sinks in again, we will all have to pay the penalty.