Greece: Should it give in to default – Argentinian style?

11th July 2011

Like Greece now, in 2001 Argentina had been struggling because decisions about its monetary policy were being taken elsewhere i.e. in Washington.

It had pegged the peso to the dollar but that also effectively pegged it to American interest rate policies despite the fact its economy was facing low growth and a high deficit.

Many economists believe that breaking the peg, despite temporarily deepening the crisis, then allowed Argentina to recover at quite a spectacular rate of growth.

The differences however are stark too. Greece is not in a currency peg – it is part of a single currency. It is also part of the huge political entity called the European Union. Argentina, it could be argued, was hitching a ride on US economic policy in the belief it would encourage economically beneficial discipline but it was also a lot easier to jump off. 

And although Argentina's decision to break the peg did impact on other countries, they were not such closely aligned allies, as the other Mediterranean states of the EU are for Greece.

Some are urging Greece to take action now however.

In this weekend's Observer Heather Stewart considered the issue in some detail.

Stewart writes that: "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.

She also quotes Alan Cibils, chair of the political economy department at the Universidad Nacional de General Sarmiento in Buenos Aires who said: "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."

She also quotes Mark Weisbrot of the Center for Economic and Policy Research (CEPR) in Washington who says: "Argentina drew a line in the sand. They said we're not doing any deal that puts us in the same situation three years from now. It was a successful default. Their economy reached the post-crisis level of output within three years, which is going to take Greece ten years if they're lucky. They took 11 to 12 million people out of poverty in that time."

However, recently, the Wall Street Journal talked to several other Argentinean economists familiar with events there and they were cautious about whether it could work for Greece.

Reasons included – Greece's deep integration in the European Union-especially its use of the euro-would make it harder for Athens to renege on its debts or ditch its currency the way a more isolated Argentina did.

"Greece doesn't have a growth engine equal to Argentina's farming sector, which was able to exploit the weak peso-and a near tripling in global soybean prices over the past decade-to drive the recovery."

The WSJ quotes Daniel Marx, who was Argentina's chief debt negotiator until shortly before the default, who says: "Even if Greece stopped paying its debt, the next day it would have a budget imbalance to confront," There are no easy choices for Greece, it seems.

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