Alexandria

Would Greece be better off just going ahead and defaulting big? The major case study that gets brought out, among those arguing the case pro and con, is Argentina, which did just that in 2002. Argentina had in common with Greece an unpayable debt and a currency that it did not control (having pegged its currency to the dollar at the time). As it happens, I remember the Argentine debt economic crisis mainly through the stories of the unfortunate salesperson at my former company who had been handed, for her territories, Argentina and Japan, neither of which countries was economically thriving at the time. So I have only limited prior knowledge of how Argentina survived the crisis. But I can give you a round up of what other people have been saying.

Greece Should ‘Default Big,’ Says Man Who Managed Argentina’s 2001 Crisis

“This debt is unpayable,” Blejer, who was also an adviser to Bank of England Governor Mervyn King from 2003 to 2008, said in an interview in Buenos Aires. “Greece should default, and default big. A small default is worse than a big default and also worse than no default.”

Heather Stewart at The Guardian makes the case for following Argentina’s example.

The peso plummeted to $0.25 within months, Argentina became a pariah and the economy slumped. Yet by the second quarter of 2002, it had bounced back to growth. And aided by high commodity prices and a boom for many of its key trading partners, Argentina continued expanding at a healthy clip, 8% on average, until the credit crunch hit.

“Default and devaluation enabled Argentina to get its economy on track, and to get hold of its exchange rate and monetary policy again, and to be able to do this in a way that served the country’s needs better than the needs of the financial markets,” says Alan Cibils, chair of the political economy department at the Universidad Nacional de General Sarmiento in Buenos Aires.

The Economist says think again, the Argentine default was savage.

But the Argentine precedent shows just how savage the crisis can be; massive social unrest, a sequence of toppled presidencies, and so on.

The Global Post (from which I got the two preceding links) has a round up on Argentina’s lessons for Greece (subtitled: Argentina defaulted on its debt and lived to tell about it. But at what cost?)

Manthos Delis argues that default is not a prudent option, and that if Greece will actually implement structural reforms this time around, and not just recessionary austerity measures, it can turn its economy around.

If the structural reforms were now in place, I am not sure at all that a recession would be hitting the Greek economy. After all, zero economic growth would imply a public deficit as low as 4-5% of GDP, which is still high but “acceptable” compared to the current one of almost 10%.

Given the above, the road ahead should be clear to all the involved parties, i.e. the Greek government and the Troika. Greek politicians should break bonds with political and economic interest groups and facilitate change through structural reforms, giving priority to the liberalization of markets and to the strengthening of institutions. The first will gradually create new investment and employment opportunities and the second will help increase public revenue through the reduction of tax evasion and corruption.

Tyler Cowen thinks that default would probably mean Greece leaving the euro zone and an exodus of deposits from Greek banks.

Forbes says that Greece now has a primary surplus and can default outright. I’m not sure, though, whether to believe in this primary surplus, since neither Greece nor the troika seems to be acting as if they believe that Greece now has a primary surplus, and since most of the econ blogs are still discussing the situation as if Greece doesn’t have a primary surplus.

Brad DeLong says, citing Lorenzo Bini Smaghi, that This (Greece) is what the IMF was made for, and that it will take a full IMF program to prevent default.

Edward Hugh is pessimistic both about the sustainability of the current situation and about the viability of default.

The present situation is unworkable, and unsustainable, not only because the accumulated debts are unpayable by Greece alone, but also because the tiny size of the manufacturing industry Greece has ended up with and the general lack of international competitiveness of the Greek economy make an export-lead growth process with the present state of relative prices virtually impossible. There are solutions to both these problems consistent with remaining within the Eurone and without default – issuing Eurobonds to accept part of the Greek debt and enforcing a substantial internal devaluation to restore external competitiveness, for example – but since the adoption of these two strategies is virtually unthinkable given the current mindsets in Brussels, Frankfurt, Berlin and Madrid then we are more or less guaranteed to find ourselves facing some kind of Greek default…

… What matters is whether Greece becomes Turkey (oh, what a historical irony) or Argentina. If the powers that be can agree on an ordered restructuring of Greek debt, and a controlled exit from the Eurozone, then Greece has some possibilities of turning the situation round. If exit is forced on Greece in order to escape the clutches of both the EU and the IMF then the move will be, as I suggest in my title, simply the last exit to nowhere. And especially in a historic context of ageing populations and rapidly rising elderly dependency ratios, ratios which will only rise further if thousands of young people exit Greece in the search for work elsewhere, as young Argentinians did in 2002/3. That’s another difference most people who make this comparison don’t mention: when Argentina devalued the country still had a fertility rate which was slightly above replacement level. Greece has just had more than 30 years with a total fertility rate in the region of 1.3. So while Argentina could look forward to years of demographic dividend and rapid “catch up” growth, if things go wrong Greece can only look forward to an ever older population and ongoing social and economic decline.

The Washington Diplomat discusses the parallels and pitfalls, for Greece, of the Argentina comparison.

Since its catastrophic financial crisis and debt default a decade ago, Argentina’s economic performance has been among the strongest in Latin America. The economy grew by 9.2 percent in 2010 and is projected to expand by another 8.3 percent in 2011. High commodities prices and growing Chinese demand have helped Argentine exporters fill their coffers at impressive rates. Even as the world financial system careened into crisis in 2008 and 2009, Argentina’s decline was comparatively mild; according to the World Bank’s data, the nation’s worst year came in 2009, when the economy still grew by 0.6 percent….

At the height of the crisis in 2001, Argentina had five presidents in less than two weeks, amid riots in the streets that left dozens dead. Political stability was then a distant fantasy. The situation in Greece is not so severe — yet — but even if it gets far worse, Argentina serves as a reminder of how quickly things can improve….

But the drama doesn’t necessarily follow the same script. While Greece can take heart from the fact that Argentina bounced back relatively unscathed, there are some important differences in each nation’s finances. At the time of its default, Argentina’s debt-to-GDP ratio was about one-third the size of today’s Greek debt, which stands at around 150 percent of its GDP. Greece has also already received billions in bailout funds from other eurozone countries. And as Gros points out, “If Greece were to follow the Argentine script and be forced to leave the eurozone after a messy default, its nominal GDP is likely to be halved. In that case, the Greek government’s debt to its eurozone partners would be equivalent to 400% of its GDP, very little of which would be repaid. Argentina defaulted on its private debt, but at least it repaid all its official debt.” …

Tags: Argentina, Blejer, debt crisis, default, Greece