Defaulting Rescued Argentina. It Could Work for Athens Too
Struggling under an impossible burden after its IMF bailouts, Buenos Aires knew its one hope was to stop paying its debts and become a pariah – and so it proved
Protesters on the streets of Athens this summer have been brandishing banners depicting a panicky helicopter airlift. Not Saigon at the height of the Vietnam war, but Buenos Aires in 2001, when Fernando de la Rúa fled from the roof of his presidential palace to escape riots in the streets.
Argentina, stuck in a painful recession since 1998, had done everything the International Monetary Fund had told it to do. After several bailouts, the government imposed wave after wave of eye-watering austerity measures, as prescribed by the "Washington consensus", and sought a voluntary restructuring with its private sector creditors, all of which will sound familiar to the Greeks.
Yet the economic crisis continued to worsen. In December 2001, as the government slapped a limit on cash withdrawals – the so-called corralito – to prevent a destabilizing run on the banks, the IMF effectively pulled the plug, saying it could not complete the latest of many reviews of Argentina's economic policies – a condition of it receiving continued financial support. "Within a month of this announcement," as a subsequent internal IMF review put it, "economic, social and political dislocation occurred simultaneously".
The Argentinian people took to the streets in their hundreds of thousands, banging their pots and pans, and threw out the government. A caretaker president, appointed to take over from de la Rúa, was also deposed within weeks, giving way to Eduardo Duhalde.
In the depths of the political and social crisis, Argentina risked the wrath of the world's financial markets and the IMF and defaulted on its debts, suspending repayments on some of its bonds. In early 2002, it abandoned the cherished one-to-one peg to the US dollar.
"Argentina drew a line in the sand," says Mark Weisbrot of the Center for Economic and Policy Research (CEPR) in Washington. "They said, we're not doing any deal that puts us in the same situation three years from now."
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.
"It was a successful default," agrees Weisbrot. "Their economy reached the post-crisis level of output within three years, which is going to take Greece 10 years if they're lucky. They took 11 to 12 million people out of poverty in that time."
Like Greece, Buenos Aires had swallowed the textbook analysis – backed by the IMF and the consensus of academic economists and domestic politicians – which said its problem was not an overvalued currency and unsustainable debts, but too much public spending.
As the economists Roberto Frenkel and Martin Rapetti put it in a study of the Argentine crisis for the CEPR, the theory was that "fiscal discipline would entail stronger confidence, and consequently the risk premium would fall and bring interest rates down. Therefore, domestic expenditure would recover and push the economy out of the recession. Lower interest rates and an increased GDP would, in turn, re-establish a balanced budget, and thus close a virtuous circle."
It didn't work. In fact, drastic public spending cuts made the downturn worse, while the dollar peg prevented the devaluation that eventually helped Argentina to get back its competitiveness.
Similarly, Athens – locked into the euro – is unable to devalue, or control its own interest rates, and the solution being pressed on Greece by its eurozone neighbors involves privatization, liberalization and drastic public spending cuts.
"The parallels are really striking," says Peter Chowla of the Bretton Woods Project, which monitors the IMF and the World Bank. "Argentina had an IMF loan, which required austerity, and it failed for more than a year, and then they decided to double down, give them another loan and demand more austerity."
There was also a series of voluntary restructurings, similar to the scheme being proposed for Greece, which briefly bought the Argentinian government some time, before the markets lost their nerve and bond yields shot up again.
Cibils traveled to Greece in May to tell campaigners about Argentina's experiences. "It just blew my mind that these policies that have failed catastrophically, repeatedly, are now being pushed on European countries," he says. His message to activists was that "default is not only not the end of the world; default is the first step of your next stage. What's happening now is unsustainable. When the ECB and the French and German policymakers say a default would be a disaster, they're speaking on behalf of the financial industry."
Argentina's experience does show that default is not simple, or easy. The "social dislocation", as the IMF put it, was profound. Meanwhile, it took years to negotiate a deal with about three quarters of its bondholders, under which the value of its debts was written down by about 75%. It had to impose foreign exchange and capital controls to prevent money flooding out of the country – completely against the IMF rulebook – and bail out domestic banks and households whose debts were denominated in foreign currencies.
Even now, some of Argentina's creditors are still holding out, and it has been unable to return to financial markets. But most of its deficit resulted from interest payments on its debts, so it was able to get by without borrowing in the years succeeding the crisis.
Greece is running a deficit even without its interest payments; but Weisbrot says more sources of capital are available than a decade ago. Several countries rejected by western lenders, including Venezuela and Cuba, have been able to borrow from China in recent years; and Greece is a small economy, so would need modest sums, in global terms.
Talks on a fresh bailout for Greece from the IMF and the EU appeared to have run into the sand last week, with banks unable to agree the terms of a potential debt rollover, and credit ratings agencies warning that any such deal would constitute a "selective default" – anathema to the European Central Bank. Meanwhile, the ECB pressed ahead with its plan to raise interest rates, ratcheting up the pressure on the struggling eurozone economies, including Greece, amid growing questions about whether the IMF would release the final tranche of last year's emergency bailout. Christine Lagarde, the IMF's managing director, has reiterated the need for Athens to press on with its spending cuts.
Even with a new rescue package, Argentina's experience suggests that the protesters on the streets are right to see nothing ahead but austerity, austerity, austerity, and to question whether it will work. For now, financial markets, led by the mighty ratings agencies, are dictating the pace of events. But unless politicians get a grip on the situation, Weisbrot warns, Greece will lurch from one crisis to another: "I don't see a happy ending."
TIMELINE OF DECLINE
April 1991 Argentina enacts 'convertibility law', pegging its currency to the US dollar
1995-99 Dollar appreciates strongly, taking the Argentine peso with it and wrecking the country's industry
1998 Economy slides into recession
December 1999 Fernando de la Rúa is inaugurated as president and asks for a bailout from the IMF
10 March 2000 IMF agrees a $7bn loan on condition of a strict 'fiscal adjustment'
January 2001 Another bailout, this time as part of a $40bn package, from the IMF and other lenders
16 June Government announces a $30bn debt restructuring, in which bonds are exchanged for new loans, and a 7% devaluation
19 July Unions call a general strike to protest against austerity measures
6 November Another day, another debt swap, this time of $60bn worth of bonds. Ratings agencies declare it a default
30 November Run on the banks; de La Rúa puts restrictions on cash withdrawals
5 December IMF withholds the latest installment of its bailout loan
19 December Rioting against rising unemployment and budget cuts
21 December De la Rúa resigns and escapes by helicopter; senate president Ramón Puerta appointed as interim president for 48 hours
23 December Another temporary president, Adolfo Rodríguez Saá, is appointed until elections in the spring
26 December Saá announces that repayments on Argentina's debts will be suspended
30 December Saá is forced to resign amid continued public unrest. Congress elects Eduardo Duhalde to succeed him
6 January Duhalde announces a devaluation to 1.4 pesos against the dollar
30 January Announcement that peso will be allowed to float on foreign exchanges