Home The Washington Diplomat November 2011 Argentina 2001 vs. Greece 2011:
 The Parallels and Pitfalls of Comparison

Argentina 2001 vs. Greece 2011:
 The Parallels and Pitfalls of Comparison

Argentina 2001 vs. Greece 2011:
 The Parallels and Pitfalls of 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.

Such was the confidence that President Cristina Fernández famously used the crisis to poke at Western economic prescriptions for her nation, saying in a conference with investors at New York’s Council of the Americas in 2008, “it seems to me that you are the ones needing a Plan B.”


Credit: UN Photo / Evan Schneider
Argentine President Cristina Fernández, addressing a U.N. meeting of the “Group of 77” developing countries last year, was resoundingly re-elected into office last month on the back of robust growth, with Argentina’s economy among the strongest in Latin America, only 10 years after its catastrophic debt default.

But Argentina’s current relevance doesn’t stem merely from robust GDP growth during the past several years. Because of its success in overcoming the aftermath of its economic calamity in 2001 and 2002, some today look to Argentina as a model for how Greece can crawl its own way back from calamity.

After all, if Argentina, just one decade ago, could survive the world’s biggest sovereign default and a massive devaluation when it abandoned its dollar-pegged peso, why can’t Greece — burdened with a debt load that amounts to 150 percent of its GDP, which many economic experts say it will never have the means to pay off — do the same today? As Stephen Brown of Reuters reported, at one point protesters in Athens floated a balloon in front of parliament asking: “Yesterday, Argentina; Today, Greece; Tomorrow?”

The question though is not that simple, nor is Argentina’s own economic outlook. The bigger question is why, with the same team responsible for the recovery from the crash handily winning another four years in power in the October presidential election (with Fernández far surpassing her nearest competitor), are so many people so bearish about the future of the booming Argentine economy?

Ominous History Lessons

One big reason is history: For the past century, Argentina has been one of the most economically volatile countries in Latin America, with a business cycle known for wild swings and periods of extreme optimism culminating in harsh downturns. “Every decade or so there is a crisis in Argentina, and it looks like we are moving toward that,” said Riordan Roett, director of the Latin American Studies Program at the Johns Hopkins University’s School of Advanced International Studies.

The depth of the crisis in 2001-02 also helps fuel lingering pessimism. It was not merely a nasty recession — the crash was the culmination of three years of decline, which gave the episode the hallmark characteristics of a depression. The peso devaluation ruined the savings of millions of Argentines; the number of poor skyrocketed in the once-rich nation, with more than a quarter of its citizens unable to afford even a healthy diet in 2002 and 2003; and the default on more than $132 billion in foreign debt was the largest the world had ever seen.

History aside, a handful of current factors has also contributed to the concern over the future of Argentina’s economy. One is that the recent growth is based on unsustainable policies as well as fortuitous international circumstances. On the latter for instance, prices for soybeans, a major Argentine export, have soared to around $500 a ton — buoyed by food demand in Asia and the biofuels market — from about $180 at the time of the 2001 crisis.

On the former issue, the recent tiger-like growth rates have been fueled by increases in the fiscal and monetary base, as Cristina Fernández’s team readied itself for the coming election. But because of the resulting budget deficits, Kirchner’s administration will be forced to tighten its belt in the years to come, which will, in turn, kneecap the explosive growth rates.

Indeed, the Economist Intelligence Unit predicts that after 8.6 percent growth in 2011, the economy will expand by only 4.9 percent next year; by 2016, growth will have slipped down to 3.5 percent. Other agencies differ in the specific statistics, but offer a broadly similar forecast.

Inflationary pressures, which have a long track record of torturing Argentine policymakers, have also set off alarm bells. Worse still, independent economists say that the government’s inflation numbers are doctored. The government has even resorted to fining economic forecasters who publish alternative figures and pressuring journalists who write critical accounts to give up their sources. This feeds the perception that for Fernández, the health of the economy is secondary to her administration’s political ambitions. “Under her it’s been clear that they either have no policy or don’t care about the creep-up of inflation,” Roett charged.

Fernández’s longstanding habit of flouting traditional economic orthodoxy has also provoked concern. She nationalized the pension system in 2008, so as to obtain the $30 billion in the system. Two years later, she fired the central bank president, after he refused to hand over $6.6 billion in reserves that Fernández had demanded so as to service the foreign debt.

A disregard for international consensus is essentially written into Fernández’s political DNA. As the foundation stone of the recovery, many analysts point to the decision by Néstor Kirchner, the nation’s former president and Fernández’s late husband, to force a harsh “haircut” onto creditors in 2005. As Dean Baker, co-director of the Center for Economic and Policy Research, told The Diplomat, “If you envision that they went down the IMF path of trying to pay the debt, it was hard to see how they would get out of that.”

Roett, referring to the policy adjustments most responsible for the recovery, makes essentially the same point, though in much less favorable language: “They have basically walked away from all their obligations, which has made it much better for the domestic economy.”

That may be so, but it has not inspired confidence in Argentina’s future. With the central bank widely seen as a puppet of the Fernández administration, and little confidence in government data, an unflattering image with a long history in Latin America begins to take shape: that of a populist government, either unconcerned or genuinely unaware of the eventual consequences of its risky actions, blithely leading the economy down the path to disaster yet again.

a2.argentina.biz.storyPhoto: Larry Luxner 
Businessmen walk Calle Florida, one of the main pedestrian shopping streets in Buenos Aires. Last year, Argentina’s economy grew by 9.2 percent and is projected to expand by another 8.3 percent in 2011. 

But is that ominous picture accurate? More to the point, is another crash inevitable?

Baker does not believe so. “You are not going to sustain 8 percent growth, that’s not realistic,” he said. “But 4 or 5 or 6 percent growth, I think there’s every reason in the world to expect that. That translates into really large gains in living standards in the country.”

Baker pointed to political rivalries as a factor driving much of the gloom surrounding Argentina’s future, and said he didn’t expect any major changes to the government’s policy to be necessary in a second Fernández term. “I don’t see any imminent catastrophe,” he said.

Other economic experts agree, and argue that Argentina serves as a shining example that bond markets and foreign investors need not be the end-all-be-all when it comes to generating economic prosperity.

“Argentina’s experience contradicts the widely held conventional wisdom that recessions caused by financial crises must be followed by slow, painful, difficult recoveries. Argentina started growing just one quarter after its default, and reached its pre-recession level of GDP just three years later,” said Mark Weisbrot, co-director of the Center for Economic and Policy Research, in the report “Argentine Success Story and Its Implications.”

“There has also been a huge reduction in poverty and inequality, and record gains in employment. Clearly most Argentines have benefitted enormously from the government’s economic policies, and that’s why Cristina Fernandez de Kirchner is likely to be re-elected. The percentage of Argentines in poverty and extreme poverty has fallen by about two-thirds from its peak,” Weisbrot added. “This should give pause to those who argue, as is quite common in the business press, that pursuing policies that please bond markets and international investors, as well as attracting FDI [foreign direct investment], should be the most important policy priorities for any developing country government. Argentina’s success suggests that these capital inflows are not necessarily as essential as is commonly believed.”

For her part, Fernández and her team remain defiant about their policies. In September, she spoke admiringly (if not particularly modestly) to the U.N. General Assembly about her “faith in the path we have chosen, of growth with social inclusion.” In perhaps the clearest sign of that faith, Fernández also elevated her minister of the economy, Amado Boudou, to serve as her vice president in her second term.

Greece: A Comparable Calamity?

Even if you chalk up the recent economic performance to a combination of good fortune and myopic irresponsibility, and even if you regard the Fernández administration and that of her late husband with distaste, the mere fact that the political system is stable enough for the same regime to remain in power essentially for three presidential terms is an impressive achievement.

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.

That potent reminder is why many economists such as Nobel winner Paul Krugman say Greece, like Argentina 10 years ago, cannot keep stomaching painful austerity measures while expecting economic growth to magically bounce back.

In fact, Daniel Gros, director of the Brussels-based Center for European Policy Studies, outlined the eerie similarities between the two nations in the Project Syndicate op-ed “A Tale of Two Defaults.”

He described how “there was a country plagued by large deficits, high inflation, and decades of economic stagnation.” So it tied itself to a more powerful currency and growth returned, but the government’s fiscal policy was a mess and its ballooning public debt unnerved investors. At first, the international community stepped in to support the ailing economy.

“The first rescue package envisaged a resumption of growth, a decline in the fiscal deficit, and structural reforms. None of this was achieved, as the economy deteriorated under the impact of the fiscal measures, which were not offset by a surge in exports, because wages could not be lowered to gain competitiveness,” Gros wrote. “One year later, risk premia were even higher than before, and a second bailout package was put together, followed by a large ‘voluntary’ debt rescheduling. But none of this was enough to restore the confidence of international investors, who were not convinced that the government could service its debt in the face of mounting social resistance and an economy that continued to contract.”

That sequence of events of course led to Argentina’s downward spiral a decade ago. “Greece also had a history of fiscal problems and inflation, which were supposed to be cured by admission to the European Union’s Economic and Monetary Union (EMU) in 2001 (coincidentally, just as Argentina was preparing to default),” Gros writes. “Its first decade in EMU was also characterized by rapid economic growth, fueled mainly by abundant and cheap capital inflows. But during this first decade, a key underlying problem emerged as Greece lost competitiveness relative to Germany, just as Argentina had lost competitiveness to Brazil.

“The Greek experience — so far, at least — looks like a replay of the Argentine drama,” Gros concludes.

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.”

Perhaps most important, while Argentina’s debacle certainly caused some international ripples, especially among neighboring nations, the threat of a Europe-wide — and even global — contagion in the event of a Greek default is much greater, with Spain, Portugal and Italy all tabbed as future problem spots that could tip the world back into full-blown recession.

The primary lessons are perhaps not in how to recover from a financial catastrophe, but in how to avoid a certain species of them. Both Argentina and Greece locked themselves into a currency regime controlled outside their borders, linking them to nations with very different economic needs and business cycles. In Argentina’s case, this stemmed from tying the Argentine peso to the dollar in the 1990s in a system known as convertibility; in Greece, the currency regime is the euro.

In both instances, there was a lengthy initial period of calm that made the monetary regime seem a wise course. However, when circumstances turned unfavorable, policymakers in both Greece and Argentina were unable to use the flexibility of a national monetary policy — like the United States can — to smooth out the instability. Furthermore, the monetary straightjacket of convertibility and the eurozone has made exiting the regime a far more complicated undertaking (and, as indicated above, more difficult for the Greeks than in Argentina). This original sin eventually led to disaster in both cases. Argentina, like perpetually mismanaged Greece, would have been better off never linking its economy to a stronger currency managed abroad.

Hindsight of course is 20/20. The question now is how steep the price will be for that mistake — for Greece, Europe and the world. And even if Argentina offers some important history lessons, that country’s own economic future has yet to be written.

About the Author

Patrick Corcoran is a contributing writer for The Washington Diplomat.