Home > debt crisis > Argentina collapsed before default (graph)

Argentina collapsed before default (graph)

from Dean Baker

Ezra Klein’s WonkBlog has an interesting piece asking whether Greece is going to have the dubious honor of having the largest economic downturn in modern history. The piece quotes Uri Dadush, a former World Bank official, who predicts a decline of 25-30 percent, which would beat both Argentina’s 20 percent decline in 1998 to 2002 and Latvia’s 24 percent decline in the current crisis.
The piece is a bit sloppy on one point, saying that Argentina’s decline followed the default on its debt in December of 2001. Actually, the vast majority of the decline preceded the default. Argentina’s economy had already contracted by more than 16 percent by the time of the default. It shrank by around 5 percent following the default before turning around in the second half of 2002. 

Graph: The Argentine Crisis: Real GDP Source: International Monetary Fund

This matters in the current context since many people are asking what alternatives Greece has to following the austerity path being demanded by the IMF, the ECB, and the EU. While there are reasons that a default would be more difficult in Greece’s case than Argentina’s (most importantly Argentina had its own currency), the post-default experience of Argentina suggests that it probably chose the better route.

  1. February 21, 2012 at 8:11 pm

    The Argentina´s lesson is clear. The default was the turning point. There was a new issue of debt on 2003, with a, more or less, and difficult to quantify due to complex structure of new bonds, 65% haircut.
    The mix included bonds in US dollars as well as bonds in A pesos tied to GDP growth and others tied to inflation.
    About 80% of bondholders (number is by heart) accepted. Grudgingly. At the time Argentina was treated as a pariah state, with economic MSM saying that disaster was going to happen very soon.
    The holdouts on the exchange of bonds recurred to New York state judges. They have not seen a single penny since.
    The currency was devalued by the end of 2001 and after that, under Nestor Kirchner who took office in the first months of 2003 it was pegged to the dollar at about 30% of the previous 1 to 1 parity.
    A steep tax system on agricultural exports was established, which yielded, helped by international hign prices, to offset the consequences of the alienation from capital markets.
    Since that Argentina has seen it´s public debt ratio to GDP fell significantly.
    Policies carried on were stimulative, with big payouts to people under poverty line.
    A broad public investment policy was also developed.

  2. February 22, 2012 at 10:44 am

    I think the most important difference with Argentina and Greece, is the fact Greece have a shared currency while Argentina had their own. A separate currency makes all the difference in crises as you have the freedom to manipulate the currency throught fiscal policies which Greece just cant do. A good example is the UK, they are much better off having not joined the Euro as they became a sort of safe haven from the euro as there currency was trusted more.

    Sorry for a bit of spam, but give my blog a read if you like: http://economicinterest.wordpress.com/

  3. February 22, 2012 at 12:32 pm

    On the issue of Argentina’s own currency, just a question for those better informed… Was it not it a fact that the Argentinian currency was overvalued as it was «linked», «indexed» (or whatever) to the American dollar?…

  4. Pavlos
    February 22, 2012 at 2:53 pm

    For minor economies such as Greece or Argentina, the difference of having a national currency is not so great. In either case sovereign debt is in some foreign currency such as dollars or euros, so bankruptcy means not being able, or choosing not to, pay bonds when they come due. Only the US, UK, and a handful of other economies have sovereign debt in their own currency, and that puts then in a much better situation.

    The currency discussion is worth having because the Eurozone as a whole has debt in its own currency and could, for example, devalue it. That would suit Greece, Italy, etc. but not Germany. The fact that the Eurozone chooses to have a hard euro rather than devalue it is worth a political debate. The complaint is that Germany is imposing Germany’s preferred monetary policy rather than one good for Europe as a whole, or at least one sensitive to the debt crisis.

    Other than that, having a sovereign currency makes a difference mainly in the internal economy during and after a default. With a sovereign currency, some semblance of normality is maintained. There’s moderate inflation and imports like iPads become more expensive relative to domestic products such as tomatoes. For the average person, this is good. With a situation like Greece in the Euro, the state goes bankrupt in a strict accounting sense, like a business. At best, the state can spend as many Euros as it earns, day by day, and that means hard cuts or other serious cashflow problems. At worst, the state is in some kind of receivership where some of its assets or income go to creditors first.

    The political question for Greece is really not about exit from the euro (at least not because of bankruptcy) but about the mechanics of bankruptcy. In the US, states and large corporations fall under bankruptcy protection regularly. They do not get liquidated – they are protected and recover. In the first instance, why does the Eurozone lack such mechanisms formally? Specifically for Greece, the impression of many people (and this is hard to assess objectively because of a lack of transparency) is that Greece is being steamrollered into some form of ad-hoc receivership that favors creditors over the people.

    But the people are bankrupt, you say. Yes, they are. Well, the state is. But the “zero” position is a sudden default where Greece refuses to pay bonds on maturity and uses every Euro of tax income to pay salaries and pensions. Any settlement that keeps credit flowing but extracts either assets or income to pay off debt is, worse than that, in monetary terms, from the point of view of Greeks. Such a settlement may make sense in terms of goodwill (and that’s really why people pay their debts generally) but in Greece’s case goodwill is very worn out with all parties.

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